What doesn’t kill you makes you stronger — and per­haps that ap­plies to banks in tough eco­nomic times, writes Gil­lian Jones

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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.

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