As the books closed for 2021, the operating environment that contextualised the period for South Africa’s major banks was in some ways more familiar.

While 2020 began with a brief period of normality, the Covid-19 pandemic dominated the entirety of 2021, according to PwC’s Major Banks Analysis.

Learnings from navigating the extreme uncertainty during earlier phases of the pandemic – coupled with shifts to new ways of working and delivering financial services – aided the major banks’ abilities to navigate 2021 with a focus on stability, innovation and digitally-led operational excellence.

Against more supportive conditions, the major banks delivered strong results on the back of a rebound in economic activity, increased client engagement levels and gains made through the execution of their digitally-centric strategies.

PwC Africa banking partner Rivaan Roopnarain says that, after consecutive periods of significant uncertainty, the major banks are optimistic that the rebound in economic activity and consumer confidence will gather momentum.

“Further embedment of digital innovation and ESG-related metrics into reporting and performance measures are likely to remain important elements of overall bank strategy,” he says.

Key themes observed from PwC’s Major Banks Analysis include:

* Supportive economic conditions and an improved credit cycle provided the basis for an unwind in risk provisions across loan portfolios. Credit impairment charges decreased 59,6% year-on-year, underpinning an acceleration in headline earnings to the region of pre-pandemic levels. However, some risk provisions remain to cater for macro risks and the still uncertain path of the pandemic.

* While the major banks results for the period largely reflect positive credit performance, underlying franchise momentum and heightened client transactional activity combined to result in resilient pre-provision operating profit growth of 6,2% year-on-year. Interestingly, revenue pools from the delivery of broader financial services – including from insurance activities and asset and investment management – represents a growing contribution to non-interest revenue.

* Deliberate risk appetite management and disciplined approaches to credit origination remained observable, while the low-interest rate environment, pent-up consumer demand and favourable buy-side property market dynamics supported credit growth.

* Credit quality has improved, evidenced by the decrease in the stock of non-performing loans. This reflects a combination of collections efforts, client repayments and credit migration into lower risk bands.

* Continued focus on, and investments into, further building out digital banking capabilities resulted in positive client satisfaction scores and experience sentiment. While these efforts made for a more competitive banking environment, they also translated into client acquisition gains in some cases and a higher proportion of digitally-active clients, which grew 8% against FY20 (and 22% against FY19).

* Key metrics across capital, liquidity and provisioning were consistently maintained and further bolstered in FY21, reflecting the stability and resilience of the major banks’ balance sheets. The combined common equity tier 1 capital ratio, a core measure of capital strength, strengthened to 13,4% (FY20: 12.3%), surpassing pre-pandemic levels. These robust balance sheet positions provided the foundation for the major banks to continue to support clients and execute on their strategies.

* Tight cost control continued, with expense growth managed below CPI growth for the period. As the major banks double-down on embedding their digitally-led strategies, we expect that the next wave of cost reduction will mostly come from productivity improvement, digitisation and reshaping enterprise priorities as opposed to more traditional measures such as reducing discretionary expenditure or optimising headcount.

* Changes in the scope and delivery of financial services is unrelenting, particularly across the African continent. Africa remains the world’s largest adopter of mobile money transfer systems, accounting for approximately 70% of global mobile money transactions and two-thirds of the world’s mobile money transaction volume by value (according to research by The Brookings Institute). The major banks’ foreign operations in the rest of Africa contributed 17% (FY20: 21%) to total headline earnings, dampened by stronger relative performances from South African operations and rand currency strength.

* Data is now clearly seen as a strategic asset, informing product innovation, the scaling of new businesses and investments in a new range of skills – from data scientists to engineers.

* Accelerating cloud adoption and use of emerging technologies. The acceleration of strategic partnerships between some of the major banks and established and emerging technology players highlights extensive efforts to access and deploy cloud and other new technologies in order to gain competitive advantages. The major banks understand that implementing cloud-based solutions, AI, algorithms and other changes are foundational in an era of expansive digital change and customer expectations.

* Responding to evolving social and regulatory expectations to climate risk and ESG-related topics is a high priority. As financial intermediaries and risk managers, banks will play a key role in facilitating an orderly energy transition as economies, markets and companies adapt to evolving climate policy. At the same time, they will seek to service the wide-ranging ESG needs of clients and the growing investor appetite for ESG products, evidenced by several ‘green-bond’ issuances that the major banks undertook in FY21.

Costa Natsas, PwC Africa financial services leader, says while 2021 remained a difficult year for many South Africans, some stakeholders expect that the worst of the pandemic is now in the rear-view mirror.

“Against relatively supportive conditions and deliberate management of risk appetite, the major banks’ results for the period exhibit the strength and stability of the South African banking industry.”

* Headline earnings: Underpinned by a 59.6% decrease in the combined credit impairment charge, headline earnings grew 99% against FY20. Underlying franchise performance across all areas of activity reflected a combination of strategic initiatives and heightened client engagement. Good top-line growth across net interest income and non-interest revenue (which grew 5,4% and 5% respectively) translated into operating income growth of 5,2%.

* Credit growth: The low-interest-rate environment supported demand for prime-linked credit, including home loans and vehicle and asset finance. This environment also provided an opportunity for households, businesses and corporates to service existing debt, which played out in the lower combined credit loss ratio of 74bps (FY20: 180bps). Corporate and commercial credit demand also showed signs of recovery in certain key industry sectors. However, commodity producers and other players in the commodity value chain used the higher commodity price context to optimise credit levels by re-paying facilities.

* Credit quality: Total non-performing loans fell 8,1% and comprised 4,7% of gross loans and advances (FY20: 5,5%). This trend is driven by an improvement in risk profiles, focused collection efforts and client repayments. Specific impairment coverage levels increased to 45,8% (FY20: 41,3%) reflecting the risk profile of remaining non-performing loans.

* Costs: Disciplined cost management continued, with combined operating expense growth of 4,5% tracking better than headline consumer inflation of 5,9%. Unpacking expenses, we continue to observe proactive discretionary spend management, an evolving approach to property rationalisation strategies in light of hybrid working arrangements and investments into technology related spend, including strengthening the talent pool in key areas such as cloud, cyber security

* ROE and capital: Regulatory capital levels have surpassed pre-pandemic levels, with the total capital adequacy ratio amounting to 17,2% (FY20: 15,3%), well above regulatory required levels. Notwithstanding robust capital positions, the combined ROE of the major banks expanded to 15,9% (FY20: 8,3%) reflecting, in part, the improved credit environment and the operating strength of the major banks core client franchises. All of the major banks declared a dividend for the period to

* Liquidity and funding: Total deposits grew 7,4% with continued activity in shorter-term products – current, savings and transmissions accounts – while the loan-to-deposit ratio averaged 86.3% (FY20: 87%).

Francois Prinsloo, PwC Africa banking and capital markets leader, says the major banks delivered strong results for the period, validating efforts made by management teams over the worst phases of the pandemic.

“Having consistently maintained robust balance sheet metrics across capital, liquidity and credit provisioning, these results reflect a rebound on the back of a more supportive operating environment and the focused execution of their digitally-led strategies.”

He says PwC analysis has consistently revealed a truism of South African banking – that bank performance is in many ways connected to the broader economic context and prevailing operating conditions.

While the major banks expressed cautious optimism in their outlooks, a level of macro-related uncertainty exists in two key areas:

The domestic economic context

South African economic growth will soon revert back to its long term, low-growth trend if impactful structural changes are not made. As the bounce back from lockdowns comes to an end, South Africa’s economic growth rate is moderating back to pre-pandemic levels. This reversion serves as a reminder that stronger economic growth is always possible if the right decisions are made at a policy level.

Global geopolitical tensions

The volatile exchange rate – and its impact on domestic inflation – is at the mercy of international financial market sentiment and could quickly weaken if, for example, the geopolitics around the complex and evolving Ukraine/Russia situation deteriorates further. The PwC South Africa Strategy& Economics team has looked at the potential impact of the situation on the South African economy.

The key points are:

* The impact of events in and around the Ukrainian and Russian economies are further disrupting regional and international supply chains;

* Ukraine is known for the agricultural bounty provided by its fertile soil – its agricultural produce feeds 600-million people annually. In turn, Russia is one of the biggest players in the global energy (oil and gas) market;

* South Africa has some industry-specific exposure to trade with Ukraine and Russia (for example, about 10% of South Africa’s wheat consumption is imported from the two countries); and

* The biggest risk for South Africa is the impact of higher international commodity prices and financial market volatility on local producer and consumer price inflation – and, by implication, interest rates.

Strategic outlook for banks

The resolve to reimagine the future of financial services will continue to be at the forefront of overall bank strategy. PwC expects key themes to include:

* Integrating climate-related risks into lending policies and pricing strategies, existing enterprise risk management and external reporting frameworks.

* Accelerating ‘trust-building’ activities generated over the course of the pandemic as a result of actively supporting clients and communities.

* Optimising the business/service mix and aligning incentives to help clients navigate the financial aspects of climate related risks and energy transition.

* An unrelenting focus on digital innovation across channels, platforms and products remains central to structuring differentiated propositions.