Bank earnings have recovered – the focus now is on digital as customer trends shift
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THE MAJOR banks experienced a sharp earnings recovery in the first half of 2021 from the depressed Covid-19 related trading conditions of the previous year, but recovery at the banks is still under way.
Headline earnings of the major banks, combined, increased a whopping 177 percent to R40.6 billion in the first six months of 2021, PricewaterhouseCoopers’ (PwC’s) Major Banks Analysis 2021, released on Friday, showed. The report highlights key themes from the results of Absa, FirstRand, Nedbank and Standard Bank.
The combined earnings figure however, was still 4.5 percent behind 2019 levels, as PwC’s analysis for 2019 showed the combined banks’ headline earnings at R42.49bn in that year.
The key driver of earnings growth in 2021 was sharply lower credit impairment charges across most lending portfolios and customer segments after credit conditions recovered in the first half of 2021, and following considerable provisioning in the 2020 financial year.
In addition, record commodity prices supported South African corporate earnings across several key industries, and in turn, loan performances within the banks’ wholesale credit portfolios.
Higher commodity prices also supported the performance of the major bank subsidiaries in other African countries, offset by exchange volatility and the fall-off of tourism.
Robust growth in banking revenues supported an increase in pre-provision operating profit, driven by heightened client activity, rising digital transaction volumes and credit demand, albeit off a low base comparatively. Offsetting these positives on revenue were tighter interest margins and negative endowment effects given the low interest rate environment, and challenging bank assurance earnings due to heightened mortality and retrenchment claims and higher reserving requirements.
Return on equity shot back up to 15.4 percent, not yet at pre-pandemic levels, but well up from only 5.4 percent in the first half of 2020. Dividends have also been resumed. Also, as customers’ financial positions started improving post the effects on the economy after the hard lockdowns, the banks’ credit loss ratio narrowed to 82 basis points from 232 basis points in 2020. The banks did their best to support their customers, staff and communities through the pandemic. Meanwhile, recent lessons learnt and emerging customer and workforce trends saw bank management teams re-imaging the bank strategies.
PwC said a client focused digital strategy was now a minimum requirement for banks and the central challenge for the banks currently was to increase their 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,” the report said.
Various operating models had begun to emerge – 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 were also changing, with environmental, social and governance issues rising rapidly on the agenda of the banks.