An FNB branch. Picture: Kevin Sutherland
An FNB branch. Picture: Kevin Sutherland

The bottom line is that the top line stinks. That is the challenge facing SA’s biggest banks as they fight to contain costs that are accelerating faster than revenue.

The reasons are pretty much the same: SA’s economy hasn’t expanded at more than 2% a year since 2013 and unemployment is at 27%. In addition, consumers are being battered by rising taxes, fuel prices and higher utility bills. Companies, meanwhile, are waiting to invest until they get clarity on land expropriation and state-owned companies so deeply mired in debt that they threaten the state’s finances. That is why many lenders are looking to the rest of Africa, but home is still where the money lies.

“This is showing just how tough the South African environment has been, while their African operations are outperforming,” Sanlam Investment Management head of equity research Patrice Rassou said. “It’s a function of low top-line growth and rising costs.”

The Big Four — Standard Bank, FirstRand, Absa and Nedbank — all reported results that either disappointed or forewarned investors that targets were becoming increasingly difficult to hit. All of them suffer in differing degrees from what is known in banking parlance as “negative jaws”: when costs grow faster than income.

Foggy outlook

The outlook is foggy too. FirstRand said on Tuesday that full-year earnings growth may not beat inflation because of private-equity gains in 2018 that would not be repeated, while Nedbank said last week it was becoming increasingly challenging to reduce its cost-to-income ratio. Besides, even if the lenders do manage to boost revenue, they face the prospect of bad debts rising from levels near historical lows, Rassou said.

The reprieve of credit-loss ratios that range from 53 basis points at Nedbank to 86 basis points at FirstRand is helping to lift earnings. There are also some signs of life, with the last six months of 2018 showing improved revenue and profit growth.

Adjusted earnings per share at FirstRand rose 6% in the six months to the end of December, the only one of the larger banks that has a year-end in June. The second half of 2018 also saw profit accelerate by 4% at Absa, from 3% in the prior six months, and 8% at Standard Bank, compared with 5% previously, according to data compiled by Bloomberg. Earnings growth slowed to 3.5% at Nedbank after a rebound in its investment in pan-African Ecobank Transnational in the first half of 2018 resulted in a 26% jump in profit.

‘Only way’

Nedbank, which makes half of its earnings from corporate and investment banking, will benefit once companies regain trust, and Standard Bank and Absa will continue to reap gains from their expansion into Africa, said Nolwandle Mthombeni, an equity analyst at Mergence Investment Managers.

FirstRand’s FNB led the way in consumer lending by cross-selling more of its products to customers, showing that it pays to invest in digital platforms that engage with customers, she said.

“As a bank you have to lend to grow, it’s the only way,” Mthombeni said. “At least banks must position themselves for business confidence to return, keep engaging with corporate clients to see where they are and be ready to lend when they are ready to start investing again.”

The six-member FTSE/JSE Africa banks index had fallen 1.1% by 11.09am in Johannesburg on Wednesday, paring gains this year to less than 0.3%.