Big banks brace for home-front battle
Adventures abroad may take back seat as competition hots up
● After an expansion drive that saw the big four banks gobble up businesses in the rest of Africa and beyond, the time for adventuring may be drawing to a close as competition on the home front hots up.
Unsecured lender Capitec — which has shown with its strong growth trajectory over the past decade that the big four banks are not untouchable — seeks to increase its reach in the middle market. Joining the race are first-time entrants Discovery Bank, Bank Zero and TymeDigital which will challenge the big banks’ dominance at the top and bottom ends of the market.
But the fiercest competition is likely to come from among the big four themselves, all of which continue to invest heavily in digitalisation— such as apps, robotics and artificial intelligence — in order to deliver seamlessly integrated products.
“It’s fierce out there,” Standard Bank CEO Sim Tshabalala said on Thursday after presenting the bank’s full-year financials.
“Nedbank, FirstRand and Absa are doing really smart things to become more competitive.”
Nedbank, for example, will roll out the functionality for a potential client to open an account from the comfort of their couch before year end, with biometric data such as fingerprints being captured through a mobile device. CEO Mike Brown said the bank would accelerate its digital journey to boost its retail business.
But so are all the other big banks. With the execution of these strategies now in full swing, the timing for the big banks to capitalise on this investment could not be better.
On the back of Cyril Ramaphosa’s ascension to the presidency, the economy is teeming with optimism. Consumer and investor confidence is expected to flourish and after several years of weak credit growth, there is pent-up demand for loans.
Despite challenging economic conditions reported in the fourth quarter of last year, national credit health has improved since 2016, according to credit bureau TransUnion. Yet with estimates that household bank debt accounts for 72.5% of disposable income, banks are unlikely to open up a credit tap right away.
But as the economy strengthens and jobs become more secure — and with a potential interest rate cut on the cards — consumers will be in a better position to qualify for lending, said Adrian Cloete, portfolio manager at PSG Wealth.
Barclays Africa, which will become Absa Group in June, is arguably at an advantage in seizing all of this potential. Its brand and IT systems will undergo a facelift at no expense to shareholders after it negotiated a separation payment of about R12.8-billion when British bank Barclays plc sold down its stake in the local bank.
“It’s like they won the Lotto. It is spending it later in the digitalisation journey [compared with the other banks], so it has more optionality when it comes to what to invest in,” said Neelash Hansjee, banking analyst at Old Mutual Equities.
It will also be rebranding and changing its name to Absa in its rest-of-Africa operations where it, with Standard Bank, has a large footprint — something analysts believed would weigh slightly on earnings growth. Though these markets, which have projected growth rates that outstrip South Africa’s and a low level of banking penetration, had been attractive in recent years, much of the excitement around their potential has been dampened by weak commodity prices.
The cost of regulatory compliance in a number of geographies also makes the case for a stronger regional or home market focus — a lesson Barclays plc learnt the hard way. Though Barclays Africa was a strong performer in its stable, remaining a majority shareholder in a bank outside the UK became costly.
Adding to the regulatory burden, a stronger rand makes any expansion overseas, such as FirstRand’s acquisition of UK lender Aldermore, a pricey undertaking.
But Tshabalala is confident that Standard Bank’s operations in the rest of Africa will not see it lose focus back home. “There is a history in our group, going as far back as the 1980s, of international activity, so we haven’t suddenly woken up to the African opportunity. It is in our DNA,” he said.
“I’m not worried that the African continent becomes a distraction. In fact, I’d be delighted if it made up a bigger proportion of our headline earnings.”
At the moment it accounts for roughly a third of Standard Bank’s earnings.
Tshabalala said the bank had enough human capital to remain focused on the battleground back home, where the big four banks have known for a while that disruption was on the horizon.
So if they are unable to protect market share from new entrants and technologydriven financial services companies, they will get what they deserve, said FirstRand’s outgoing CEO, Johan Burger.
“The assumption most people make is believing that coming up with a very customeroriented digital capability is enough. That’s only part of the issue. You still need to understand the customer, the data around the customer, the products and the balance sheet. The big banks already have all of that,” he said.
Although it has been argued that digital players are likely to beat the big banks on price, by being able to keep operating costs low, Burger said the big four would remain competitive if they were careful not to price legacy systems into fees.
On Friday PwC said the big four had shown resilience in difficult times and posted collective headline earnings of R76.1-billion at 31 December 2017, up 5.2% year on year.
It’s fierce out there
Sim Tshabalala
Standard Bank CEO