Can today s operational challenges create tomorrow s opportunities?

Transcription

1 Can today s operational challenges create tomorrow s opportunities? A review of South Africa s banking sector financials March 2018 Analysis of South Africa s six largest banks, based on 12 month data as at financial year-end

2 A sombre but improving economic outlook South Africa s growth recovered in 2H17, but remains weak Weak and declining GDP growth Political leadership changes Weak credit growth and consumer confidence Low investment levels driven by weak business confidence The IMF has revised South Africa s GDP growth forecast downwards The IMF continues to lower its growth forecast for SA. It believes that growth will average 0.9% p.a. over the next two years. However, others are more optimistic, one forecast even sees growth at 2.3% in Drought and water crisis SSA will grow somewhat stronger than previously thought, at 3.8% in GDP 5.7 GDP Q15 2Q Q Q15 1Q16 2Q Q Q16 1Q17 2Q17 3Q17 4Q Source: StatsSA Source: StatsSA, IMF Page 2

3 South Africa Macroeconomic overview GDP growth gradually recovers The Rand is appreciating, along with other EM currencies (change US$ 2017) The fiscal deficit remains above recommended norms (%) Forex reserves are gradually rising (US$ bn) IMF, World Bank growth forecasts at 0.9% and 1.3% respectively Inflation remains within its 3-6% target f 2019f Impact of S Africa India Mexico Brazil Russia What to watch Rising fiscal gap 2019 election cycle Change in President, signaling business friendly shift Water crisis especially in Cape Town Current Corporate governance BEE codes New political leadership Commodity price moves Policy formulation Budget squeeze Weak but improving consumer & business sentiment Page 3

4 Low GDP growth has driven slower bank profits growth SA s bank earnings growth in 2017 was the lowest since the GFC Longer term each 1% rise in GDP sees a 5% rise in bank HE 28.5 HE growth GDP Source: StatsSA, EY Analysis Page 4

5 Low GDP growth has slowed credit growth Credit growth has slipped from pre GFC double digit territory 12 Private Sector credit extension Source: SARB Page 5

6 South Africa banking review CAGR Total Advances % growth Total Assets % growth Total Revenue % growth Headline Earnings % growth Efficiency ratio bps change pa Interest margin bps change pa ROE bps change pa lowest highest 2017 Another challenging year, characterised by Weakest credit and headline earnings growth in 10 years Tepid interest and revenue growth But there was support from stronger margins and contained impairments Increasing efficiency ratios due to weak top-line growth Slower returns (measured by ROE), but offset by lower cost of equity Very weak retail consumer and corporate confidence Rest of Africa also faced challenges, providing little uplift Page 6

7 SA Banks Inc. Balance sheet highlights Advances are growing well ahead of deposits 6 largest banks % change Total Deposits Rbn Total Advances Rbn CIB Mortgages Vehicle Finance Business Card Africa lowest % change: Top 6 banks Corporate and Investment bank lending growth is the strongest. African lending remains weak for a 2 nd consecutive year despite stronger economic prospects in the 2 nd half. Asset finance reflects a weak economy and falling vehicle sales. highest = industry average Total deposits Total advances Page 7

8 SA Banks Inc. Income statement highlights Interest income remains strong despite slow advances growth 6 largest banks Rbn % change Headline Earnings Net interest income Non interest revenue Impairment charge Total revenue Strong pressure remains on fee income. All banks recorded positive growth (albeit mostly marginally so) in NIR. Two banks recorded double digit NII growth. Both revenue and headline earnings are in line with or exceed inflation. lowest % change: Top 6 banks highest = industry average Headline earnings Net interest income Non interest revenue Total revenue Page 8

9 SA Banks Inc. selected ratio analysis Earnings were driven by stronger margins, contained costs and stable impairments bps change Impairment ratio (5 banks) Interest margin (4 banks) Efficiency ratio (5 banks) Interest margins are rising despite the weak sentiment as banks focus on risk based pricing. Impairment ratio was once again lower despite a weak economy and expectations of a rising impairment cycle. Mild revenue growth has contributed to higher efficiencies ratios for most banks. lowest basis points change: Top 5 banks highest = industry average impairment ratio interest margin efficiency ratio Page 9

10 SA Banks Inc. selected ratio analysis (contd) Returns continue declining, driven by rising capital levels 5 largest banks bps change T1 capital adequacy ratio COE ROE ROE year average = 15.3% ROE s are declining, but remain strong even by Emerging Market standards. ROE remains above its five year average. In addition, there was an increase in the core capital adequacy ratio in The lower COE shouldered some of the impact of lower returns. Three banks reported lower Tier 1 CAR. = industry average lowest basis points change: Top 5 banks highest T1 CAR COE ROE Page 10

11 SA Banks Inc. segment and product split CIB advances growth outpace RBB but RBB earnings growth exceeds CIB 2017 Headline earnings ZARbn Africa 8.9 Business 11.9 Wealth 6.1 RBB Headline earnings ZARbn Africa 8.9 Business 11.7 Wealth 6.6 RBB 27.2 RBB and CIB remains neck on neck for position for largest earning contributor. CIB 28.1 CIB 25.7 Wealth s total earnings fell for a second consecutive year due to unfavourable capital markets. CIB Business Transactional banking Mortgages Earnings by product % change Although Africa s earnings were flat, individual banks had varying experiences. CIB earnings growth was lower than RBBs despite stronger advances growth due to the more competitive, lower margin nature of CIB. Instalment Finance Card Page 11

12 Impairments remain benign, despite the weak economy 0.91 The credit loss ratio remains well below long-term levels 5 banks year average = 0.8x 0.68 The impairment ratio continued to trend down despite expectations of a weak economy pushing the ratio upwards Unsecured lending impairments remain the highest For the rest, impairments remain within a manageable range. Personal loans Card Africa Asset Finance Retail Business CIB Mortages Page 12

13 Operating expenditure is in line with revenue growth The major pressure stems from IT and associated costs Operating Expenses Rbn Total Staff Other N/D IT Property N/D Professional fees N/D Depreciation & amortisation Marketing N/D Communication & Travel N/D Percentage growth 2017 Staff costs remain well contained in line with headcount reductions and branch network reconfigurations Impairments provided a strong lift to profits in There was a noticeable slowing in IT & associated cost growth during the year, although they remain above the rate of inflation Depreciation & Amortisation IT Total Staff Impairments -9.2 Page 13

14 Efficiency ratios are trending above the 54 55% range 5 year average: 54.9% H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 Efficiency ratios are rising driven by slow top-line growth and rising IT investment needs. IT and associated amortisation charges account for a rising share of costs. Shrinking physical networks are reducing headcount and staff costs. The need to launch and refine digital platforms further drives required spend. Cost pressures are well managed, but the need for IT investment and rising regulatory compliance will not disappear any time soon. Robotics may change the cost trajectory over the medium term but an upfront expense is necessary. Page 14

15 The shift to digital channels grows Branch networks shrink across the rest of Africa % change 2017 Employee numbers -2.9 Branch network ATM network -6.5 Branch networks across rest of Africa shrink, but ATM footprints are growing Africa Branch network -3.2 ATM network +1.2 Major banking markets Page 15

16 Local banks face more intense competition Both locally and in the rest of Africa Global major banks focus areas Optimistic outlook but risks are rising (geopolitical shocks and tightening monetary policy) Digital investment to drive business optimisation Revenue growth hinges on technology, which will focus on platforms, and drive automation Strong focus on customer centric initiatives and enhancing the customer experience Implementation of IFRS9 could represent up to 30bps of T1 capital, but it is difficult to forecast its impact on profits SA banks focus areas Competition will intensify as three new banks enter the market (Discovery, TYME, and Bank Zero) and two relaunch (PostBank and African Bank) Lending will remain prudent and pricing will reflect the true risk of lending Ongoing Competition Commission investigations into forex trading raises the public profile of the sector Fintech remains both an opportunity and a threat, all banks have a strategy to digitalise and benefit from digital disruption Africa s potential remains attractive; most continue investing despite recent challenges more diverse portfolios fare better IFRS9 will lead to higher impairment charges in line with new definitions Page 16

17 With you today Jane Fitton Financial Services Africa Leader Tel Mobile Ernest van Rooyen Financial Services Africa Partner Tel Mobile Graham Thompson Africa Knowledge Leader EY Tel Mobile:

18 Insights EY s Global Banking Outlook 2018, Pivoting toward innovationled change EY survey of senior bankers at 221 institutions across Europe, North America, Asia-Pacific and emerging markets shows that banks are seeking to become digitally mature, completing the transition from regulatory-driven transformation to innovationled change in order to insulate themselves from future downturns. Today, 19% of respondents consider themselves as either digitally maturing or a digital leader, but more than 60% aspire to reach these stages by Visit ey.com/za Building a better working world.com Financial Services #SABankingAnalysis2018 Page 18

19 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. Page 19