Financial services defy trends
IT HAS been more than a year since the failure of African Bank Investments Limited. Since then, I am convinced no sizeable bank in SA would be allowed to fail by the Reserve Bank and the Treasury. By sizeable I mean FirstRand, Standard Bank, Barclays Africa Group, Nedbank, Capitec and Investec. In fact, we can bet that insurers such as Sanlam and Old Mutual would never be allowed to fail.
If African Bank, as small as it is, was not allowed to go down, then we might as well accept that all the sizeable banks in SA are too big to fail. Central bankers do not like hearing such things, but if it’s the reality then we might as well deal with it. The question is: What is to be done to ensure that they don’t fail? Is part of the solution regulation and ensuring the central bank endorses solid executive and nonexecutive directors?
Let’s face it, if we allowed the banks and large insurers to fail, the economy would follow suit.
I often use this space to shout about certain elements of the financial services sector, especially when it comes to transformation. I must concede that SA’s financial services sector rules the roost. It has been resilient, despite SA’s economy floundering.
If one looks at Statistics SA’s figures, one will note that the finance, real estate and business services sector grew 2.7% in the second quarter — the fastest growth of all sectors. In this group, the finance sector is dominant, and I would argue that if finance col- lapsed then real estate and business services would follow. Real estate just has a lot of bank and insurance money going into it. There is a lot of pensioners’ money lifting up the cranes in Sandton, whether we like it or not.
After finance, real estate and business services, the closest growth came from personal services — 1.3%. Mining and quarrying shrank 6.8%.
At a company level, SA’s financial services sector has been growing breathtaking profits as if it is divorced from what is happening in the economy. In the six months to the end of June, SA’s big four banks — FirstRand, Standard, Barclays Africa and Nedbank — posted combined headline earnings of R32.8bn, a 17.7% increase in the same period last year, research by PwC showed last week.
One of the reasons the banks are doing well is good management. Let’s admit that if Stephen Koseff and Bernard Kantor were not at Investec, and younger blood had replaced them when the 2008-09 crisis happened, Investec would have been in different shape today. Look at how FirstRand’s Sizwe Nxasana has managed to grow group earnings and market value. It talks to good management. Think of Johan van Zyl at Sanlam or Julian Roberts at Old Mutual — it’s just solid management.
The other thing is the new profit pools coming out of the rest of Africa. The PwC banking analysis showed Barclays Africa Group’s rest of Africa operations contributed 20% to its total headline earnings, Nedbank’s rest of Africa’s operations made up 6.5% of its total headline earnings, and FirstRand’s generated 6.7%. Standard Bank’s rest of Africa operations contributed 27.8% to its total headline earnings. It means expansion into the rest of Africa has helped, while things have been tough in SA.
Despite the tough environment, banks have been growing locally. A statement from First National Bank yesterday showed that FNB Life, the product distributor and administrator of the newly licensed FirstRand Life, issued its first 100,000 standalone funeral policies in just 72 days, at a rate of nearly 1,400 a day. This is at a time when the economy is sluggish and not creating jobs.
Of course, transformation in SA has contributed to this because these financial institutions now make profits from a large black market that was previously neglected. Financial inclusion has assisted.
All of these things show how strong the finance sector is. I submit that if it has grown so much that it makes up 19.8% of SA’s economy, alongside real estate and business services, then it really cannot be allowed to fail. This puts regulators under pressure to keep the sector in check, ensuring all capital and liquidity requirements are met and that solid management is in place. It also forces the sector to groom a new breed — and a strong, multiracial pipeline — of future executives. A failure to do so will force the Reserve Bank and the Treasury to dole out huge bail-out packages.