Digital strategies helped the major banks show signs of recovery after a year of unprecedented challenges triggered by the pandemic, on the back of an economy that was already struggling with sustained weak growth and persistent structural challenges over the past decade.
Against this challenging backdrop, the major banks – Absa, FNB, Nedbank and Standard Bank – delivered resilient results when underlying business momentum and risk profiles performed better than expected thanks to them focusing on their operational and financial resilience and supporting customers, communities and colleagues.
According to PwC’s latest SA Major Banks Analysis for the period ended 30 June, the banks’ combined headline earnings of R40.6 billion increased by 177% against the first half of last year (1H20), with a combined return on equity of 15.4% (5.4% at 1H20), a net interest margin of 403 bps (392 basis points at 1H20), credit loss ratio of 82 basis points (232 basis points at 1H20) and a cost-to-income ratio of 55.9% (55.1% at 1H20).
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Major banks learning from challenges
Although operating conditions were relatively supportive in the first half of 2021, several challenges still affect the South African economy made worse by new waves of the pandemic and record highs in unemployment amid expectations of continued uncertainty, says Rivaan Roopnarain, director of banking and capital markets at PwC.
Globally financial markets were supported by fiscal stimulus and low interest rates, while vaccination rollouts broadened beyond advanced economies. Armed with recent lessons learnt and emerging customer and workforce trends, management teams have focused attention towards reimaging overall bank strategies, such as digital strategies.
Central themes from major banks
Central themes from the results of the major banks include:
- Headline earnings benefited from sharply lower credit impairment charges across most lending portfolios and customer segments
- Record commodity prices supported South African corporate earnings across several key industries and in turn loan performance within wholesale credit portfolios
- Regionally, commodity-led economies also benefited from favourable prices which aided the performance of the major banks’ subsidiaries in these territories
- Key balance sheet metrics, including capital, liquidity and provisioning, continued to show resilience and with improved underlying performance trends, PwC observed a return to double-digit return on equity, although not yet at pre-pandemic levels and dividend declarations by all of the major banks
- Costs remained tightly managed below CPI growth, benefiting from a stable inflation environment and lower travel and entertainment costs
- Some of the major banks implemented property optimisation strategies as they rethink corporate and branch real estate resulting in savings on property costs
- Overall, expenses increased moderately due to staff cost increases, bonuses and amortisation/depreciation charges on the back of continued technology investments, including continued investment in digital offerings
- Robust growth in banking revenue supported an increase in pre-provision operating profit, driven by a combination of heightened client activity, digital transaction volumes and credit demand
- Revenue growth was offset by tighter interest margins and negative endowment effects given the low interest rate environment and challenging bank assurance earnings due to heightened mortality and retrenchment claims and higher reserving requirements.
Client focus at major banks now expected minimum
According to PwC a client-focused digital banking strategy is now expected as a minimum. This means that the central challenge for banking in an increasingly competitive environment is increasing relevance to customers.
“While investments in IT architecture, digital platforms, data and automation continued, the major banks highlighted ambitions to capture learnings from the Covid-19 crisis and transform how they deliver products and services,” Roopnarain says.
He pointed out that various operating models have begun to emerge, ranging from providing end-to-end services alongside underlying financial transactions, to creating ecosystems by connecting customers with partners, fintechs and other providers through open architecture and outsourcing some aspects of the delivery model to strategic delivery partners.
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The perception of board members, investors, customers and regulators regarding value and risk are changing, with environmental, social and governance (ESG) issues rising quickly to the top of the agenda.
“Thinking is moving beyond reporting of climate-related disclosures and environmental, social and governance policies. The need for a convincing ESG strategy and appropriate performance measurement indicators is now front of mind. While these topics cross industries, the major banks are astutely aware of the shifting dynamics and importance of these areas.”