Not much is going the banker’s way
HALF-YEAR BANK RESULTS to end-June reflect what’s happening in the broader economy: growth is sluggish, consumers and companies are reticent to commit to big projects and as a result are reluctant to borrow. In turn, banks – after the shock of the bad debt cycle – are considerably more discerning about those to whom they lend and are pricing more aggressively now than they did two years ago.
This, coupled with lower interest rates that eat into the returns banks receive on their own capital – the so-called endowment effect – means SA’s financial sector is struggling not only for short-term profits but also battling to write new business. Were it not for some fortuitous bad debt write backs, bank earnings would be showing serious declines. As it is, growth is at best pedestrian amid concerns about the state of the global economic recovery and South Africa will struggle to grow at 3% this year.
The endowment effect on bank results is significant. In the case of Nedbank, every 50 basis point cut in interest rates leads to a loss of R600m/year in interest income on its own capital.
“The endowment effect is short-term pain for long-term gain,” says CE Mike Brown. “We prefer low interest rates, as it’s better for our business over the long term.”
However, the difference between the current cycle and previous periods when interest rates fell is that consumers are heavily indebted. The sector is still dealing with the consequences of the credit splurge that took average household debt to disposable income levels to 78%. Brown says many of those who can afford to take on new credit are paying down their existing debt levels rather than taking on new lines of credit.
The group’s credit loss ratio improved in the six months from 160 basis points to 146 points: in other words, the bank writes off around R1,46 for every R100 it lends. The long-term average is around 80 points and Brown says he’s confident the group will return to that level over time. But analysts aren’t convinced it will happen any time soon.
The big question facing banks is where they will generate new growth. Over the short term, at least growth will be elusive. Brown confirmed Nedbank will miss its internal target of achieving GDP plus CPI plus 5% in 2010 – around 12% – but said he hoped to return to that growth level yearend 2011.
A core new focus area for Nedbank will be in retail – the division lost R115m in the six months to end-June – almost twice as much as in the corresponding period last year but an improvement on the second six months of 2009, indicating the worst may be behind it.
Nedbank is also at long last turning its attention to retail. While its peer group was focused in the early 2000s on growing client bases and targeting the rapid growth in affluence of South African consumers, Nedbank was content to focus on its corporate and investment banking franchises – both of which are dominant in their respective fields – but did so at the cost of retail.
“We’re going to be more client-centric,” says Brown. “We’ve been product focused and need to change that.” The group has embarked on an advertising campaign putting its clients at the centre of its new value proposition. The strategy is to become the primary banking relationship to more of its clients whose wealthier profile tends to mean they have multiple financial services arrangements with little concern as to where their debt sits or who provides their credit card, provided the offers are compelling.
The problem for Nedbank is that its competitors are doing the same. Acquiring clients is an expensive and time-consuming process with no guarantee of success.
Prefers low interest rates