Despite global banking turmoil, increased load shedding, the threat of rating downgrades and a greylisting, South Africa’s banks have been able to weather some rough storms.
This is because they are well-capitalised and have high levels of liquidity, says Dr Francois Stofberg, managing director of Efficient Wealth Private Clients.
Stofberg’s comments come in the context of startup-focussed lender Silicon Valley Bank (SVB) Financial Group – previously the sixteenth largest bank in the United States (US) – becoming the largest bank to fail since the global financial crisis (GFC) in 2008.
The bank collapsed mainly due to the US Federal Reserve’s (Fed’s) aggressive interest rate hikes over the last year, which crippled financial conditions in the startup environment in which SVB was a notable player.
“Unfortunately, other banks, such as Signature and Silvergate, followed suit as a potential bank run threatened the stability of the overall banking system.”
Stofberg said that the collapses created anxiety among investors that the world was facing another GFC – but stressed that the contexts were very different.
“For one, the GFC was triggered by a combination of a housing bubble, subprime mortgages, a lack of regulation, and oversight problems. In contrast, the current fiasco has been caused primarily by the Covid-19 pandemic, the associated economic downturn, and the structural shift in monetary policy,” he said.
In addition to this, the GFC was a global event, while the most recent banking crisis has been largely contained to the United States.
Stofberg said that despite the crisis, and a host of local issues, South Africa’s banks have been resilient. Additionally, South African banks have some of the best reputations among global banks, he said.
While there are risks and challenges facing the local financial sector, the South African banking system is strong and well-regulated, he said.
“(This is why) we continue to favour South African and emerging market equities, especially at a time when developed markets appear shaky. Emerging markets are only now starting their growth engines,” he said.
Banking sector performance
This stance is reflected in the latest banking sector review from financial services firm, PwC.
The group looked into the combined results of the reporting period ended 31 December 2022 for Absa, FirstRand, Nedbank and Standard Bank, then compared them to the year prior.
The data showed that banks in South Africa delivered strong earnings growth against complex operating conditions, volatile macroeconomic influences and a local economy under strain.
Combined headline earnings grew by 16.1% against 2021 to a total of R100.7 billion. PwC reported that record levels of earnings for some banks were the result of high-interest rates playing into margins and sustained efforts to ensure front-end customer experiences facilitated seamless and efficient transactional activity.
Rivaan Roopnarian, PwC’s Africa Banking and Capital Markets Partner, said that against major economic headwinds, the bank’s delivered strong earnings growth on the back of robust operating performances across all franchises, larger balance sheets and an intense focus on customer experiences.
Significant markers of positive change across major banks include:
- Combined return on equity [ROE] of 17.1% [FY21 15.9%]
- Net interest margin of 429 bps [FY21 410bps]
- Credit loss ratio of 80 bps [FY21: 76 bps]
- Cost-to-income ratio of 53.6% [FY21 55.8%]
The graph below outlines headline earnings for the country’s major banks:
PwC reported that headline earnings breaking R100 billion represents the highest combined annual earnings achieved by South Africa’s major banks ever.
“The directional relationship between South African GDP growth and the major banks’ headline earnings growth continues to be evident, said PwC.
“While the major banks’ earnings benefitted from geographic, industry and product diversification, scale, and their established franchises, the relationship between bank earnings and GDP continues to highlight the importance to the major banks of South Africa’s long-term GDP prospects and structural reforms.”
The graph below breakdowns more markers for the combined lastest results:
According to the report, bureau information from the National Credit Regulator for 2022 showed that consumers had increased credit demand, with more coming to banks for loans and other financing facilities.
For example, secured lending portfolios across the board, particularly in residential mortgages, continue on their growth trend, with overall gross loans and advances growing by 8.3%, said PwC.
Many of the major banks shared pessimistic outlooks for the 2023 year.
Reflecting on the unprecedented levels of load shedding, many of the banks said that it remains a noose around the country’s economic growth.
On average, the major banks estimate South Africa’s GDP to grow by a modest 1.3% in 2023. The banks did, however, note that the sustained rate cycle with come to slow or pause entirely.
PwC said that when looking ahead, the financial environment globally is set against entering a period of volatility with rates inflationary concerns and geopolitical instabilities on the rise.
Global research points to banks needing to accelerate the addressing of ‘old’ and new challenges such as new asset classes, increased interconnectedness and more.
The financial services firm reported that the latest final year results from the analysed banks suggest that South Africa’s major banks are ‘acutely aware of these challenges and how to navigate them’.
Read: South Africa keeps scoring own goals – and investors are taking note