Corporate banking not a silver bullet

The banking sector’s efforts in the business and corporate and investment banking segments have come under scrutiny in the wake of a recent Moody’s report that warns that the slow economy will pile pressure on to customers, rendering them unable to pay their debts.

In the ratings agency’s report, lead analyst Nondas Nicolaides notes that households will face problems making repayments despite reducing debt as a share of disposable income.

Banks have responded by tightening lending to individuals or retail customers and focusing on corporate entities instead. For example, Standard Bank — the largest bank by assets — has announced its strategic focus to grow its South African business banking segment, and grew loans 15% during the first half of the year.

The segment is part of Standard’s personal and business banking unit. It provides banking and lending solutions to smaller businesses.

Nicolaides warns, however, that modest economic growth in 2017 and 2018 will “inevitably” weaken the ability of South African companies to repay their loans. This is already happening. Lending at Standard’s corporate and business banking unit, which services large corporate clients, declined 3% (or 1% in constant currency terms) to R354bn as it suffered in a subdued credit environment.

At Nedbank CIB, the corporate and investment banking unit, weak corporate activity reduced fee and commission income during the six months.

“Corporates are holding deposits and in some instances opted to repay advances of substantial amounts and delay the implementation of increased capacity or new investment plants,” says Brian Kennedy, group managing executive at Nedbank CIB. “This is more evident in the South African mining sector.”

Although there is strong demand for credit facilities, companies are not drawing down on them, Kennedy says.

However, income earned from other product lines — trading, investment banking, property finance and corporate banking services such as trade finance and working capital — helped soothe the pain, although total income across the unit declined 2% during the first half (see graphic).

The markets desk posted the largest decline.

“The muted revenue growth resulted from a combination of lack of [rand] volatility, which impacted trading volumes; reduced equities trading volumes, a subdued money market performance and liquidity shortages and regulatory constraints in our Africa regions,” says a spokesman for Standard, who declines to be named in line with company policy. “There is a scarcity of foreign currency in Mozambique and Angola, and as a result there was reduced client activity in the trading of foreign exchange.”

Barclays Africa’s South African corporate and investment banking unit saw market clients hold off on trading due to “overall negative sentiment in the economy”, leading to a 17% plunge in its markets income.

But Nedbank CIB, along with FirstRand unit RMB, still grew markets volumes.

Kennedy says the majority of the bank’s markets business during the half year was fixedincome trading at R1.2bn, foreign exchange trading (R587m), equities (R138m) and other securities (R18m).

“Foreign exchange volumes are up year on year, while equities volumes are down,” Kennedy says. “Fixed-income volumes are flat.”

RMB says large structuring deals and a solid commodities performance coupled with strong equity flows boosted markets income by 17%.

Adrian Cloete, portfolio manager at PSG Wealth, says Standard’s markets business suffered because of its large exposure to foreign exchange.

“Nigeria, Angola and Zambia experienced currency shortages, which resulted in a lack of liquidity and therefore reduced margins. Foreign exchange margins also fell quite sharply in Mozambique.”

At Barclays Africa, the markets business failed to keep up with high revenues earned during the first half of 2016.

“Within Barclays Africa CIB’s markets business, fixed income and credit declined 11%, driven by headwinds negatively affecting bond flows, and clients had less appetite to raise funding which reduced trading volumes,” says Cloete.

Investment banking performance improved across the four big banks, except Nedbank, which experienced a slight decrease in income.