Can today s operational challenges create tomorrow s opportunities?

Can today s operational challenges create tomorrow s opportunities? A review of South Africa s banking sector financials 2017 13 March 2018 Analysis of South Africa s six largest banks, based on 12 month data as at financial year-end

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 2018. Drought and water crisis SSA will grow somewhat stronger than previously thought, at 3.8% in 2018. GDP 5.7 GDP 1.9 3.1 2.8 2 3.1 3.4 3.1 3.5 2.5 1.8 1.5 1.1 0.3 0.8 1.3 1Q15 2Q15 0.4 2Q15 0.5 4Q15 1Q16 2Q16 0.4 3Q16-0.3-0.6 4Q16 1Q17 2Q17 3Q17 4Q17 2007 2008 2009-1.5 2010 2011 2012 2013 2014 2015 2016 2017 2018-1.8-1.5 Source: StatsSA Source: StatsSA, IMF Page 2

South Africa Macroeconomic overview GDP growth gradually recovers The Rand is appreciating, along with other EM currencies (change US$ 2017) 11.6 0.6 1.3 1.7 2.1 2016 2017 2018 2019 5.8 5.5 4.7 3.1 The fiscal deficit remains above recommended norms (%) 2016 2017 2018 2019-3.3-4.2-3.8-3.7 Forex reserves are gradually rising (US$ bn) 47.0 48.2 49.1 50.3 2018 IMF, World Bank growth forecasts at 0.9% and 1.3% respectively Inflation remains within its 3-6% target 6.3 5.4 5.1 5.2 2016 2017 2018f 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 2015 2016 2017 Current Corporate governance BEE codes New political leadership Commodity price moves Policy formulation Budget squeeze Weak but improving consumer & business sentiment Page 3

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 19.5 16.4 16.5 GDP 5.7 4.8 3.4-1.5 9.5 3.1 3.5 10.4 11 2.5 1.8 1.5 1.1 6.6 5.7 0.5 1.3 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-21 Source: StatsSA, EY Analysis Page 4

Low GDP growth has slowed credit growth Credit growth has slipped from pre GFC double digit territory 12 Private Sector credit extension 10 8 6 4 2 0 Source: SARB Page 5

South Africa banking review 2013-2017 2013 2014 2015 2016 2017 CAGR Total Advances % growth +7.3 +9.1 +8.9 +4.1 +5.8 7.5 Total Assets % growth +11.7 +8.0 +9.3 +0.8 +4.4 7.4 Total Revenue % growth +6.7 +14.9 +8.8 +9.0 +5.4 9.8 Headline Earnings % growth +9.8 +13.6 +16.5 +6.6 +5.7 10.1 Efficiency ratio bps change -3.0-90 -40 0 +120-8pa Interest margin bps change +25-30 +80 +12 +11 +22pa ROE bps change +130 +400 +70-170 -35 +60pa 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

SA Banks Inc. Balance sheet highlights Advances are growing well ahead of deposits 6 largest banks 2017 2016 % change Total Deposits Rbn 4 040 3 925 +2.9 Total Advances Rbn 3 679 3 476 +5.8 CIB 1 315 1 235 +6.4 Mortgages 1 030 1 015 +1.5 Vehicle Finance 465 463 +0.10 Business 362 352 +2.9 Card 106 103 +2.7 Africa 295 309-4.6 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 -4.3 2.9 27 Total deposits 0.5 5.8 9.6 Total advances -10-5 0 5 10 15 20 25 30 Page 7

SA Banks Inc. Income statement highlights Interest income remains strong despite slow advances growth 6 largest banks Rbn 2017 2016 % change Headline Earnings 83 78.5 5.7 Net interest income 156 145 7.6 Non interest revenue 145 140 3.6 Impairment charge 32.5 35.8-8.8 Total revenue 293 280 4.7 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 -11.1 5.7 18.8 Headline earnings 2.2 7.6 13.3 Net interest income 0.2 3.6 14.9 Non interest revenue 3.7 4.7 13.7 Total revenue -15-10 -5 0 5 10 15 20 25 Page 8

SA Banks Inc. selected ratio analysis Earnings were driven by stronger margins, contained costs and stable impairments 2017 2016 bps change Impairment ratio (5 banks) 0.68 0.75-7 Interest margin (4 banks) 4.22 4.11 +11 Efficiency ratio (5 banks) 56.0 54.4 +160 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 -21-7 70 impairment ratio -2 11 30 interest margin 60 160 170 efficiency ratio -50 0 50 100 150 200 250 Page 9

SA Banks Inc. selected ratio analysis (contd) Returns continue declining, driven by rising capital levels 5 largest banks 2017 2016 bps change T1 capital adequacy ratio 13.4 12.9 +50 COE 14.0 14.4-40 ROE 17.7 18.1-35 ROE 2013 2014 2015 2016 2017 12.9 17.8 18.5 18.1 17.7 5 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 2016. 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 -50 0 140 T1 CAR -100-40 0 COE -180-35 180 ROE -200-150 -100-50 0 50 100 150 200 Page 10

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 30.3 2016 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 11.9 11.7 11.3 10.9 7.3 6.8 28.1 25.7 2017 2016 % change +9.3 +2.1 +7.6 +3.3 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 6.5 6.0 +9.1 Card 5.2 4.9 +4.9 Page 11

Impairments remain benign, despite the weak economy 0.91 The credit loss ratio remains well below long-term levels 5 banks 0.98 0.81 0.76 0.75 5 year average = 0.8x 0.68 The impairment ratio continued to trend down despite expectations of a weak economy pushing the ratio upwards. 2012 2013 2014 2015 2016 2017 5.8 Unsecured lending impairments remain the highest. 6.1 4.5 4.15 2.6 2.6 1.23 1.25 1.3 1.3 0.59 0.25 0.35 0.61 0.36 0.31 For the rest, impairments remain within a manageable range. Personal loans Card Africa Asset Finance Retail Business CIB Mortages Page 12

Operating expenditure is in line with revenue growth The major pressure stems from IT and associated costs Operating Expenses Rbn 2017 2016 2015 Total 180.3 171.0 161.5 Staff 87.5 88.3 85.0 Other N/D 23.7 22.5 IT 21.7 19.9 17.3 Property N/D 13.7 12.0 Professional fees N/D 8.5 8.9 Depreciation & amortisation 8.9 8.1 6.8 Marketing N/D 5.3 4.8 Communication & Travel N/D 3.9 3.9 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 2017. There was a noticeable slowing in IT & associated cost growth during the year, although they remain above the rate of inflation. 9.9 9 20.7 18.2 Depreciation & Amortisation 5.4 7.9 9.1-1 12.1 IT Total Staff Impairments -9.2 Page 13

Efficiency ratios are trending above the 54 55% range 5 year average: 54.9% 55.9 56.5 55.8 55.8 54.1 55.5 54.8 54.7 54.7 55.0 54.6 54.4 55.6 56 1H11 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

The shift to digital channels grows Branch networks shrink across the rest of Africa % change 2017 Employee numbers -2.9 Branch network -10.0 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

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

With you today Jane Fitton Financial Services Africa Leader Tel +27 11 772 3736 Mobile +27 83 601 1475 E-mail jane.fitton@za.ey.com Ernest van Rooyen Financial Services Africa Partner Tel +27 11 772 5479 Mobile +27 82 778 6263 E-mail ernest.vanrooyen@za.ey.com Graham Thompson Africa Knowledge Leader EY Tel +27 11 772 3202 Mobile: +27 84 242 4454 E-mail graham.thompson@za.ey.com

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 2020. Visit ey.com/za Building a better working world.com Financial Services Insights @EY_Africa #SABankingAnalysis2018 Page 18

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