JOHANNESBURG - The big four South African banks remained profitable despite South Africa's economic uncertainty , a PricewaterhouseCoopers (PwC) report found.
For the six months ended June, the the big four banks reported combined headline earnings of R35.9 billion, up 3.8 percent from the comparable period last year.
The PwC study presented the combined local currency results of Barclays Africa, FirstRand, Nedbank and Standard Bank. The firm said it did not include other major players like Capitec and Investec because of their unique business mix and reporting periods. Johannes Grosskopf, the financial services leader for PwC Africa, said on Tuesday that despite the range of challenges and the degree of economic uncertainty currently facing the market, the domestic banking system remained profitable, well managed and robustly capitalised.
“In the short term, the major banks remain cautiously optimistic about their prospects. However, focusing on innovation, investment in technological advances, and executing on their strategies will be critical for the banks to ensure they can mitigate forecast risk and contend with the difficult conditions that are likely to continue for the remainder of 2017,” Grosskopf said.
Last week rating agency Moody’s said South Africa’s low economic growth would weaken the country’s banks’ loan quality and profitability in the next 12 to 18 months, with the rating agency maintaining a negative outlook on the country’s banking system.
Moody’s further said its views were consistent with the current negative outlook on the government rating and on the large banks’ ratings. The PwC analysis found that the banks combined return on equity grew by 25 basis points (bps) against the first half of 2016 from 17.6 percent to 17.9 percent, but contracted 73bps against the second half of 2016, further evidencing the earnings challenge experienced by the major banks over the first six months of this year.
From a lending perspective, the major banks reported marginal growth in combined gross loans and advances of 0.9 percent against the second half of 2016 from R3.4bn to R3.5bn and 0.7 percent against the first half of 2016. PwC said this was the ninth consecutive reporting period in which the combined cost-to-income ratio remained in the 54 percent to 56 percent range, highlighting the challenge to further contain costs in the current climate.
The analysis also found that 57 percent of the banks total operating expenses for the first half of the year related to staff costs. PwC said the major banks continued to maintain a healthy net interest margin of 4.42 percent, which showed a 5 bps expansion against the first half of 2016 while expanding more moderately by 3bps against the second half of last year Neelash Hansjee, a banking analyst at Old Mutual Equities, on Tuesday said that while a tough economy would take its toll on banks – especially with regards to their revenues – the larger South African banking sector had remained relatively resilient.
“The banking sector remains fairly protected by their strong balance sheets and the diversification of their earnings. However, there are significant risks on the horizon for the South African banks, namely a local currency downgrade by credit rating agencies and a crisis of confidence with the possibility of a low growth environment for longer,” Hansjee said.