Continuing with understanding the nuances of the different sectors, let’s look at the banking sector this week. Let’s focus our attention on bad debts or impairments, as the industry calls them. Some customers not paying back loans is just a part of being a banker; the real issue here is how much is not paid back. This is the impairment ratio and it will vary wildly depending what part of a bank we’re looking at. For example, unsecured lending such as credit cards typically has a high impairment ratio while homeloans and other asset-backed loans (such as vehicle finance) are as a rule lower as there is a direct hit to the customer if they default (losing their home or car). We will also see a difference between corporate and individual impairment levels.
We need to look for trends within the different sections but also understand how the bank defines ‘impaired’. Some banks will make provision for a bad debt after three months of non-payment, others maybe five months, and this can distort the figures when comparing the different banks against each other. As a rule, the process of when a loan is impaired is detailed in the annual report.
The next stat is my favourite for banks and the first I look at when results are published – the cost-to-income ratio (sometimes referred to as an expense ratio). With the four large banks it is in the middle f ifties, meaning that from every rand that they receive in income costs eat up some 55c. This number was heading down to the low fifties before the crisis of 2008/09 but now seems stuck around the mid-fifties. Again here the trend is important and we can also see how the different banks measure up.
Another important set of numbers is the capital adequacy ratios. Bank are required by the regulators to keep a certain amount of cash on hand and this number is set to increase with the new Basel III regulation coming into effect in 2018 (and currently ramping up). If a bank is short on its capital adequacy ratios, it will have to start hoarding cash rather than using it to grow its lending books. However, locally, all the big banks are well ahead of the requirements so it is not a worry as things stand.
Non-interest revenue is another important number to look at. Traditionally banks made money by taking deposits at one rate and then relending the money at a higher rate the difference being their profit. They also would lend, for example, R100 for every R10 they have as a deposit (this is their capital adequacy ratios), but banks have been pushing for more revenue from other areas such as fees, commissions on other related products and of course penalties. Local banks have been pushing this number higher as they’ve been focusing on it, in one sense a good idea (crossselling products to earn the commissions) but they have to be careful about the fees and penalties.
We can of course do all the normal ratios such as revenue per staff member, per branch and even per ATM. As always, staff, branches and ATMs are a cost but also a service issue. Too few staff could mean lower service levels that could results in the bank losing customers.