Kathy Gibson reports – South Africa’s major banks are showing signs of recovering from the pandemic, with digitally-led strategies a key investment focus.
PwC’s Major Banks Analysis 2021 finds that Absa, FirstRand, Nedbank and Standard Bank are all developing new banking models where they will participate in an ecosystem that would include other financial and non-financial players.
They will do this by developing fit-for-purpose products through digital channels, with the aim of fostering better customer relationships.
This means that banks’ workforces will have to develop new skills, while new employees like digital scientists, behavioural analysts and artificial intelligence experts will be in demand. In addition, soft skills are seen to be more important as banks strive to be more human in a digital world.
The move to digital service is predicated on the need to be more relevant and to achieve a better share of the customer wallet.
The new services will be a combination of banks’ own products as well as a range of other services that can be accessed via the bank, with more personal services enabled via the customer’s preferred touch point.
There are a number of challenges inherent in developing these digital platforms, with regulatory issues and privacy concerns top of the list.
According to PwC’s Major Banks Analysis 2021, combined headline earnings of R40,6-billion increased 177% against 1H20, combined ROE of 15,4% (5,4% at 1H20), net interest margin of 403 bps (392 bps at 1H20), credit loss ratio of 82 bps (232 bps at 1H20), cost-to-income ratio of 55,9% (55,1% at 1H20)
When the major banks released results at this time last year, it was in the context of unprecedented challenges triggered by the COVID-19 pandemic. Domestically, those challenges came against the backdrop of a laboured economy — one that entered the pandemic having experienced sustained weakness in growth and persistent structural challenges throughout the last decade.
Since then, the major banks have been determinedly focused on ensuring their operational and financial resilience and supporting customers, communities and colleagues. While operating conditions were relatively supportive in the first half of 2021, the South African economy remains afflicted by several challenges, amplified by new waves of the pandemic, with unemployment having reached record highs amid expectations of continued uncertainty. Globally, financial markets were supported by fiscal stimulus and low interest rates over the period, while vaccination rollouts broadened beyond advanced economies.
Against a still challenging backdrop, the major banks delivered resilient results for the period as underlying business momentum and risk profiles performed better than expected. Armed with recent lessons learnt and emerging customer and workforce trends, management teams have focused attention towards reimaging overall bank strategies.
Central themes observed in the major banks’ results include:
- After a considerable build in provisioning in FY20 and aided by a recovery in credit conditions in 1H21, headline earnings benefited from sharply lower credit impairment charges across most lending portfolios and customer segments.
- Record commodity prices supported South African corporate earnings across several key industries and, in turn, loan performance within wholesale credit portfolios.
- Regionally, commodity-led economies also benefited from favourable prices, which aided the performance of the major banks’ subsidiaries in these territories. These gains were partially offset by volatility in exchange rates caused by a stronger rand and operations in tourism-led economies, where significant economic challenges persist.
- Key balance sheet metrics — including capital, liquidity and provisioning — continued to show resilience. Together with improved underlying performance trends, we observed a return to double-digit ROE, although not yet at pre-pandemic levels, and dividend declarations by all of the major banks.
- Costs remained tightly managed below CPI growth for the period, benefiting from a stable inflation environment and lower travel and entertainment costs. Some of the major banks implemented property optimisation strategies as they rethink corporate and branch real estate resulting in savings on property costs. Overall, expenses increased moderately due to staff cost increases, bonuses and amortisation/depreciation charges on the back of continued technology investments, including continued investment in digital offerings.
- Robust growth in banking revenues supported an increase in pre-provision operating profit, driven by a combination of heightened client activity, digital transaction volumes and credit demand, albeit off a low base comparatively. Revenue growth was offset by tighter interest margins and negative endowment effects given the low interest rate environment and challenging bancassurance earnings due to heightened mortality and retrenchment claims and higher reserving requirements.
- A client-focused digital banking strategy is now expected as a minimum. But what does it mean? The central challenge for banking in an increasingly competitive environment is increasing relevance to customers. While investments in IT architecture, digital platforms, data and automation continued, the major banks highlighted ambitions to capture learnings from the Covid-19 crisis and transform how they deliver products and services. Various operating models have begun to emerge — ranging from providing end-to-end services alongside underlying financial transactions to creating ecosystems by connecting customers with partners, fintechs and other providers through open architecture, and outsourcing some aspects of the delivery model to strategic delivery partners.
Board, investor, customer and regulator perceptions of value and risk are changing, with environmental, social and governance (ESG) issues rising rapidly on the agenda. Thinking is moving beyond reporting of climate-related disclosures and ESG policies. The need for a convincing ESG strategy and appropriate performance measurement indicators is now front of mind. While these topics cross industries, the major banks are astutely aware of the shifting dynamics and importance of these areas.
Lullu Krugel, chief economist at PwC, points out that the world is not yet back to normal and we are seeing a very uneven recovery across different economies.
Among the reason why developing economies are recovering at a slower is the slow rollout of vaccines coupled with continuing uncertainty.
Globally and in South Africa, there is still considerable uncertainty around employment.
“There has been a big focus on the fact that South Africa now has the highest unemployment rate globally,” she points out.
Unusually, GDP growth is not driving employment growth, so Krugel believes factors are creating uncertainty and so companies are not filling positions as quickly as would be expected.
Among these factors are the fact that there is no clear view of when the pandemic will end, loadshedding is still a danger, possible additional taxes are being mooted, the vaccine rollout is proceeding slowly and the unrest in July. “These are all potentially factors that are weighing heaver on companies’ decisions about whether to employ people.”