The resurgence in corporate banking
Retail still dominates, but there’s life in investment banking
WHILE RETAIL BANKING remains the driving force behind the sector’s continued stellar growth, corporate and investment banking are, after years of unspectacular performance, starting to make a more meaningful contribution to the earnings pie.
And it’s not only in South Africa. A recent report by international professional services group Accenture highlights the likelihood that retail banking globally will begin to reflect more pedestrian growth in comparison with the faster pace of expansion in investment banking, corporate markets and investment management.
The contradiction in the South African market has been Nedbank, the country’s biggest corporate lender. Years of underinvestment in its retail franchise have meant it has been dependent on the outperformance of its corporate and investment banking divisions. While Nedbank has grown all of its key divisions substantially over the past three years, it has had to play catch up in the race for dominance in the competitive retail space – and despite its best efforts, it has, for much of that time, lost considerable market share.
While Nedbank’s retail division grew earnings by an impressive 63% to R1,46bn in the year to end-December, its profit contribution was outshone by Nedbank Corporate. It grew by a more muted, but solid 35% to R2,55bn. Nedbank Capital grew by 18% to R1,14bn.
FirstRand’s star performer in the six months to end-December was investment division RMB, which reported headline earnings growth of 75%. While its contribution to group profit of R1,57bn was considerable, FNB, the retail franchise, continues to be the biggest single contributor at R2,28bn.
FirstRand CEO Paul Harris does not expect the contribution from RMB to outstrip the performance of the robust retail sector any time soon, but the group’s results do clearly illustrate how the rising interest rate cycle has curbed consumer appetite for debt. Between December 2005 and June 2006, retail borrowing rose by 14%. Between June 2006 and December last year, that growth had slowed to 11,4%.
“Corporate South Africa has come to life, and BEE and private equity buyouts are creating plenty of activity from which investment banks benefit,” said Harris, stressing that retail banking was likely to remain the dominant profit generator in the South African market, despite new regulatory issues including the National Credit Act due for implementation from June and growing concerns about the potential of the Reserve Bank upping cash reserve requirements in its efforts to cool consumer borrowing.
The substantial restructuring of Absa Capital last year has also borne fruit for the Barclays-controlled group. Predominantly a retail banking operation, Absa’s corporate and investment-banking businesses have been a source of concern to investors for some time. Under new management of John Vitalo, a former Barclays executive seconded to Absa, the unit has become more focused and aggressive in pursuing new business. The unit grew attributable earnings 46% to R1,11bn, lifting its contribution to group earnings to 14%. Absa Corporate and Business Bank grew its contribution to group earnings by 37% to R1,282bn. The unit also benefited from a migration of certain customers and products from Absa Capital.
Absa CEO Steve Booysen said the group would continue to work on diversifying its revenue streams – reflecting analyst concerns about its heavy dependence on retail banking. Its bias to retail banking has borne handsome rewards, with more than 8m clients driving record volumes through its branch infrastructure. That’s reflected in the outperformance of the Absa share price relative to its peers over the past five years.
Standard Bank is yet to report financial results to end-December but a recent trading update gave a clear indication that headline earnings per share would increase by as much as 20%. The figure is lower than the 23% achieved in 2005, but within market expectations.
The group gave no indication of the relative performance of particular business units, but analysts anticipate a stronger performance from its corporate and investment banking business. It recorded a disappointing performance in 2005 especially in its international division. A management restructuring – designed to improve performance and seek greater international opportunities in emerging markets during 2006 – was instituted. Investors will see this week whether it has paid off.
Plenty of acivity from which investment banks can benefit. Paul Harris