Major banks, Absa, FirstRand, Nedbank and Standard Bank, grew headline earnings 16.8% in the first six months, boosted by record profit from other Africa markets and despite rising credit impairments locally, an analysis by professional services firm PwC showed.
As an indication of the general dwindling of fortunes of the South African consumer, the banks’ credit loss ratio of 107 basis points (bps) was well up from 76 bps in the first half of 2022.
Balance sheet provisions also reached “unprecedented levels” in anticipation of forecast risks, the analysis’ authors said.
The cost of risk in the form of credit impairments increased across most lending portfolios. There was also heightened sovereign and currency risks in several African territories, which, coupled with interest rate pressure and the impact of load shedding on South African households and businesses, triggered increased impairments as credit models reacted to “fraught conditions”, PwC said.
Higher interest rates drove up instalments and dampened affordability, as South African households felt the burden of larger debt repayments, less disposable income and higher debt-to-income ratios.
The consumer distress increased the cost of risk — particularly in home loans, vehicle and asset finance and personal loan portfolios — while consumer-facing corporate sectors and sovereign risks in certain territories amplified credit risks across portfolios.
Total non-performing loans increased 23%, now comprising 5.2% of gross loans and advances.
In spite of the amplified risk outlook, the major banks’ balance sheets remained resilient.
The banks traversed themes of uncertainty and market turbulence brought on by higher inflation and interest rates, complex geopolitics, slow growth and volatile financial markets, PwC said.
Sub-Saharan Africa continued on a significantly faster growth path than South Africa and banks with sizeable operations across the continent saw “record contributions to earnings growth and a higher growth rate relative to their South African operations.”
The outlook for the rest of the year for the banks was expected to remain challenging as economic conditions were likely to weigh on consumer, business and corporate confidence.
In South Africa, electricity supply constraints were expected to remain a risk to the economy, while there was evidence higher interest rates were placing significant pressure on consumers and consumer-facing industries.
Globally, the banking industry faced acute scrutiny in the first quarter driven by idiosyncratic events in the US banking sector, triggering supervisory and other market actions.
“While the South African banking sector was shielded from direct spillovers, the interconnected nature of financial markets and banking in particular, resulted in reflection and learnings for the industry as a whole,” PwC said.
Rivaan Roopnarain, PwC Africa Banking and Capital Markets Partner, said the banks’ results were the outcome of “well crafted bank strategies” that responded to challenging operating dynamics and economic conditions.
Key theme from the analysis included that revenue growth benefited from higher interest rates through positive endowment effects.
Balance sheet growth and the focus of recent years on superior and increasingly digital customer experiences translated into higher transaction volumes.
Volatility in financial markets favoured trading revenues, as customer demand for hedging and risk management products was strong, particularly in relation to foreign exchange, commodity and interest rate markets.
A deliberate approach to cost management and revenue growth resulted in the lowest combined cost-to-income ratio in a decade.
Underlying franchise momentum resulted in revenue growth outweighing cost growth, creating positive operating leverage.
The digital transformation journeys of the major banks continue to mature.
The retooling of legacy technology estates to be more modular, cloud-based and agile created efficiency and productivity gains, enhanced customer experiences and helped position the banks to be able to leverage future technology transformation.
There was investment in fast emerging areas such as artificial intelligence.
The sustainability agenda was driving a range of implications from emissions targets, reporting and disclosure, lending strategies and risk management.
Costa Natsas, PwC Africa’s Financial Services Leader, said: “Having reflected on their strengths and strategies through recent periods, the major banks continued to strike the balance between managing risk and supporting customers in a difficult operating environment.”
“Looking ahead, we continue to envisage a period of uncertainty and volatility. For the banks, the balance between managing day-to-day operations, enhancing customer experiences alongside broader programmes of change, is expected to continue to seize the focus of bank management teams,“ said Natsas.
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