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PSG Asset Management is "extremely cautious" about investing in SA's big banks as it is going to be "progressively more challenging" for them to grow their revenue from fees.

Most of the banks have said they will not be increasing their fees in 2012. Key drivers of their profits are mainly fee revenue and interest income.

Paul Bosman, an equity analyst at PSG Asset Management, said the local banking market has been a "cosy oligopoly" for many years, which has resulted in bank fees being high compared to the larger global banks.

He said there is "very limited room" for above-inflation fee increases and expected pressure on the absolute level of fees as the competition picks up.

He, like most analysts, credited Capitec, which is aggressively marketing a very low-fee savings account, as a catalyst for the banking sector's intense competition.

"With more retail customers than Nedbank, Capitec has already become a serious contender with critical mass. The entry of a global bank chasing our rather juicy banking margins should also not be ruled out. Such a new entrant need not be as obedient as Barclays - Absa's largest shareholder - has been when it comes to toeing the line in the competitive landscape," Bosman said.

In terms of growing interest revenue, the two drivers are quantum of loans extended and interest margin. Bosman noted that the ability of banks to extend loans is very much a function of the country's ability to take on more debt.

He said: "With household debt-to-disposable income at 75%, South Africans need to further strengthen their balance sheets and we [PSG Asset Management] don't see tremendous growth potential for loan extension."

The unsecured lending market grew by 32% year on year to November 2011. Total unsecured credit extended is already up 64% since the beginning of 2010 and it is unlikely that the high growth rate will continue.

Banks' asset growth is expected to increase by 10% this year from a low base of 8% last year.

According to Deutsche Bank's research team, there has not been sufficient focus on cost containment. It said in a note to its clients that industry players acknowledge that, should the economic landscape deteriorate and low growth rates persist, more aggressive action "would be required" to realign the cost base. It said Standard Bank should continue to see the benefits of its late-2010 retrenchment programme.

Citi's research team agreed that Standard is the only bank with growth prospects beyond SA's cyclical recovery.

According to Citi, earnings growth for FirstRand would not receive as large a boost from lower bad debts in this year compared to the previous year.

It said while RMB, as an investment bank, was more exposed to the current global uncertainty than the other business units, it was likely to be a drag on earnings growth. Citi's analysts expect FNB to sustain its growth as it attracts new clients and delivers innovative banking solutions. Last year it showed a solid 10% increase in net interest revenue (NIR) growth.

Nedbank will probably continue with its strong NIR growth and reduce its bad-debt ratio.

Absa's plans to generate earnings from its Africa operations are considered "hazy" by Citi.

Its retail franchise delivered 5% NIR growth as the bank is "very conservative and very wary of lending".