Big four lenders surprise on upside
SOUTH Africa’s four major banks reported “solid results” last year – a period when risks to the global banking system were high, according to Tom Winterboer, the financial services leader at PWC.
A PWC analysis of the performance of Standard Bank, Absa, Firstrand and Nedbank showed average return on equity rose from 14.5 percent in 2010 to 16 percent last year, while headline earnings grew 17.7 percent on average.
At a presentation in Johannesburg yesterday, Winterboer noted that many global banks produced “mediocre fourthquarter results, surprising on the downside, while most of our banks surprised on the upside”.
The plight of many major banks was highlighted this week when Citigroup, the third-largest US bank, failed to meet capital requirements in a stress test applied by the US Federal Reserve.
Bloomberg reported the bank had “projected capital” equal to only 4.9 percent of its risk-weighted assets. In contrast, domestic banks’ average ratio rose from 12.5 percent to 12.7 percent last year.
PWC said the capital improvement was due largely to strong earnings growth.
Citigroup’s failure implied the bank would not be able to survive a repeat of the 2008 financial crisis, which caused many global banks to fail.
Given the continued banking risks – now focused on potential sovereign defaults – regulators have raised the bar for banks, regularly conducting stress tests.
Ratings agencies have also become more vigilant. Moody’s Investors Service last month downgraded by one notch the ratings of the four major banks, as well as Investec.
However, it said the downgrade was “not driven by a deterioration in the stand-alone financial strength or the financial performance of these five institutions”, but by a reduction in the government’s ability to stand by banks in trouble, due to its own rising debt.
The PWC report says that revenue growth was “muted” at 5.1 percent and the “main driver of growth” last year was the containment of cost growth at 2.6 percent.
The biggest contribution came from a 15 percent fall in the impairment charge (the cost of writing off bad debt).
The report suggests that impairment levels could have bottomed out. And it warns that the boost to earnings “provided by the decline in impairment charges has come to an end”. “This could increase pressure on earnings growth targets for 2012 and beyond.”
Earnings growth is already under pressure due to the need for banks to increase the maturity structure of their deposits, which calls for higher deposit rates. To compensate, the banks have boosted their interest income by providing riskier loans – increasing the relative share of unsecured lending.
Banks have also repriced their mortgage loans, as old borrowers are replaced by new ones. Where in the past they provided mortgage loans at prime minus one or two percentage points, they are no longer prepared to negotiate lower rates.