BA N K I N G Force still with them
banks remain a shining beacon in the distressed local economy, which is characterised by low growth and weak output, notably in the mining sector.
Though most sectors on the JSE, with the exception of retail, have shown subdued growth, banks have powered ahead. They have grown lending activities measurably and increased the focus on expanding in the rest of Africa. With the exception of Absa, this led to double-digit earnings growth in 2011 and the first half of 2012.
SA banks remain at the forefront of innovation. Various digital strategies have been unveiled, leading First National Bank (FNB) to be judged the world’s most innovative bank by the Innovation Circle judging panel of BAI and Infosys.
But challenges remain in 2013, notably on the capital side. Banks have to increase capital levels to comply with Basel 3 requirements. It is also glaringly obvious that SA’s banks have a long way to go in increasing their empowerment stakes.
The big four — Absa, FNB in the FirstRand stable, Nedbank and Standard Bank — have largely shrugged off the negative developments of the global financial crisis. But there is no room for complacency. Rising bad
FINANCIAL MAIL
DECEMBER 20 1 2 debt, pressure on disposable income, social unrest and unemployment remain big challenges.
FirstRand group cofounder and nonexecutive director Paul Harris referred to the success story of SA banks in his recent riposte to growing negative views about where SA is heading under the administration of President Jacob Zuma.
He emphasised that SA banks did not require a bailout from authorities, as was the case in many countries, including the US, the UK, Germany and France. Furthermore, he said SA banks are still exceptionally well-capitalised, even with having to meet the more stringent Basel 3 capital requirements.
Most of the excess capital SA’s banks have held has been used to boost lending and for expansion beyond the borders. Standard Bank has been the most aggressive in this, with retail head Peter Schlebusch emphasising Standard’s aims by saying the bank wants to “win the retail war”.
The bank has so far toppled Absa in the mortgage market and has taken huge strides in the unsecured lending market, winning more than 1m customers. However, this has not yet translated into stronger earnings growth, with the group reporting pedestrian expansion of 11% for the half-year to end-June.
Worries have been expressed about a possible spike in bad debt if and when the lending subsides. But growing costs in the bank’s African expansion strategy are expected to be curtailed.
At the same time its London operations continue to make a loss — most of the capital is obtained from selling other emerging-market interests in risky, but potentially lucrative African states.
FirstRand has proved that it is capable of translating strong lending growth into higher earnings. Its earnings growth for the year to endDecember stood at 26% — the same as Nedbank’s — the highest among the big four. FirstRand has clearly learnt lessons from the 2009 earnings dip. In that year it was hit by trading losses in its international activities and huge retail bad debt after years of strong lending before 2008.
The star performer in the stable has been FNB which, under the leadership of CEO Michael Jordaan, has followed an innovative digital product approach combined with strong growth in unsecured lending through EasyPlan outlets. The reduction of bad debt has probably levelled off, and growth is expected to affect earnings somewhat in future.