Up­hill strug­gle

Not much is go­ing the banker’s way

Finweek English Edition - - INSIGHT -

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

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