The JSE’s Bank Index held steady this year in a dynamic banking market, and after the big banks reported healthy earnings and remained well positioned to absorb likely asset quality risks and higher impairments next year, from a weaker operating environment.
The index stood at 10 001.75 yesterday afternoon, 9.4% lower than an annual peak on March 27, but about 8% higher than on January 2, this year and 51% higher than a low it sank to during August, 2029 through the pandemic.
Fitch Ratings said in a report this month that “robust pre-impairment profitability and comfortable capital buffers” should provide the banks good protection against higher impaired loans generation from slower economic growth, high inflation, and rising interest rates, which will pressure household incomes and business earnings”.
Fitch expects gross domestic product growth to slow to 1.6% this year, and 1.1% in 2023.
The rating agency said rising debt distress among several other African sovereigns could impede the major local banks’ pan-African expansion strategies.
“The banks recorded strong revenue growth in (the first nine months of 2022), underpinned by improved net interest margins from rising rates and higher lending growth. However, earnings’ prospects for the banks will weaken amid global uncertainty and constrained domestic electricity supply.
This will slow loan growth, dampen client activity levels and keep credit costs high. Loan quality deterioration will most likely come from personal loans and vehicle-asset financing, while retail mortgage books are expected to remain relatively healthy,” the rating agency said.
Tier 1 capital ratios were however expected to remain stable, supported by healthy internal capital generation.
“Stability of banks’ funding and liquidity profiles will remain underpinned by solid domestic deposit franchises and low reliance on external funding. Fitch expects a deposit insurance scheme and ultimately a bank resolution regime to be implemented in South Africa in 2023 or early 2024,” the rating agency noted.
The banking sector has been dynamic over the past year, with for instance African Bank acquiring two small banks after itself coming out of administration; online bank platforms such as TymeBank continuing to show strong growth in new customers; innovations among the big four banks continued as competition hots up outside of the traditional banking space; while insurance giant Old Mutual plans to open its own bank next year, after unbundling its controlling stake in Nedbank in 2018.
Banks such as Standard Bank, African Bank and Old Mutual were among the financial institutions that grew operations to better service a traditionally under-served small and medium-sized business market. The major banks also benefited from stronger insurance earnings in the past year.
An example of how innovation is helping the big banks compete is FNB, who said on Monday that payments through its FNB Pay-supported digital wallets had increased 293% year on year, as its individual and business customers continued to adopt digital payments with over R21 billion in payments made.
The bank said also the R13bn in virtual card payments processed via 4 million active virtual cards had increased by more than 250% since November, 2021.
“Individuals and businesses are choosing more convenient payment options,” said Chris Labuschagne, the CEO of FNB card.
Deloitte said in an online insight: “The South African banking sector is increasingly moving towards a ‘marketplace without boundaries’, shaped by the fast-approaching entry of new digital players challenging the status quo, and driving unprecedented levels of innovation.
“Various banks (Absa, FirstRand, Nedbank and Standard Bank) have continued to pursue large-scale transformation programmes aimed at improving customer experience, digital transformation, new ways-of-working and enterprise-wide cost reduction.”
Globally, those able to develop a clear segmentation model and differentiate themselves have achieved success in some of the most competitive banking markets.
“They have deployed an agile development approach and established a business model based on monetising customer insights through carefully built communities. We believe digital entrants in South Africa will use this recipe to achieve the same impact in the local banking sector,” Deloitte said.
It said globally, retail banking customers “are clamouring for a superior cross-channel experience and hands-on guidance during challenging times. These heightened demands will require banks to create customer experiences that are data-driven, consistent across channels, and complete with personalised advice”.
“In the long term, banks should develop inventive new applications for ESG, embedded finance, and digital assets. These efforts should prioritise empowering customers with initiatives targeting racial equity, decarbonisation, and data security,” Deloitte said.
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