What doesn’t kill you makes you stronger — and perhaps that applies to banks in tough economic times, writes Gillian Jones
Banks taking more care as they run into headwinds
Could a sluggish economy, electricity constraints and low foreign demand — with the threat of more of the same — be good for our banks? Bankers would vehemently deny this, but some of the numbers tell a different story.
SA’s economy sputtered along last year, barely able to scrape out 1,5% growth. Yet the market value of the big five banks — FirstRand, Standard Bank, Barclays Africa Group, Nedbank and Investec — increased by an average of 22% in 2014.
The banks were also able to grow earnings almost 12%.
At the same time, more conservative approaches to lending and a strong focus on reducing bad debt have placed the banks in a much sounder position as they continue to face tough economic conditions.
The difficult economic environment in their home country has also lent more urgency to the banks’ forays into the rest of Africa in search of growth. The rest of Africa now contributes almost 13% of the five banks’ headline earnings.
EY’s analysis of the banks’ 2014 performance found that their earnings were driven by lower impairments, higher margins, improved efficiency ratios and growing advances.
These all point to banks focused on running their businesses carefully. This is what they should be doing when the environment is more forgiving, but then the desire for easy profits sometimes gets in the way of the prudent approach.
Adrian Cloete, PSG Wealth portfolio manager, says the banks’ robust share price growth may be due to the fact that they appear to offer reasonable value at a time when the prices of retailers and other consumer shares are very elevated.
Nevertheless, the banks appear healthy.
Standard Bank (see previous article) has done a lot of the hard graft to place it on a better banking footing.
Its main South African competitor, FirstRand, looks set to continue delivering good returns, though the lofty returns of the past couple of years are probably not sustainable.
First National Bank, headed by Jacques Celliers, comprises the bulk of FirstRand’s earnings, which rose by 16% to R5,7bn. The bank leads the retail banks in terms of customer numbers (though Standard Bank wins on earnings), but competition for market share is fierce and the other banks are edging closer.
WesBank is also far larger than the other banks’ vehicle asset financing businesses, to the advantage of FirstRand. However, increased pressure on consumers and stubborn unemployment levels could prove a drag on the business.
There were some eyebrows raised about FirstRand’s increased provisioning for bad debt in the light of RMB’s exposure to oil and gas counters. The bank says 0,2% of its total advances book is considered high risk. Some commentators suggest the move is overkill. But Emilio Pera, EY African financial services sector leader, says under the International Financial Reporting Standards, the bank would not have been allowed to increase provisioning “just in case”. It would have to have been for a sound reason.
Barclays Africa Group, under the leadership of Maria Ramos, produced earnings growth of 10%, broadly in line with market expectations.
“A key driver for the results was the lower level of bad debts as the home loans product delivered a strong improvement in quality,” says Neelash Hansjee, Old Mutual equities analyst. This was in line with Nedbank’s performance, he says.
Nedbank, under CEO Mike Brown, grew its diluted headline earnings per share by 13% for the year, driven by a decrease in credit losses.
“Credit losses decreased materially by 19%, and the current loss ratio of 79bps is surprisingly low (given the challenging macro environment) and will have to adjust higher over time,” says Jihad Jhaveri, Kagiso Asset Management investment analyst. The lower credit loss ratio was driven by ongoing improvements in asset quality, prudent credit granting and strong collections, he says.
Perhaps it is being facetious to say a slow economy and Eskom’s blunders are good for the banking business. But many of the drivers of earnings in the past year were careful, play-it-safe tactics aimed at ensuring the soundness of banks. Hard times definitely focus management’s minds on what counts, which is arguably good for business.
We can expect more of the same in an environment of flat growth.
Difficult economic environment in SA has also lent more urgency to the banks’ forays into the rest of Africa
Nedbank CEO Mike Brown.
FNB CEO Jacques Celliers.