SA banks see more reward in the rest of Africa than at home
As load-shedding, corruption and ailing SOEs drain the fiscus, and the coronavirus hits home, none of the top bankers expect things to get better soon
SA’s biggest banks are increasingly relying on the rest of the continent to make money as an economic recovery at home ebbs ever further away.
The Big Four make the bulk of their profit in Africa’s most industrialised country, where load-shedding, incoherent government policies, corruption and ailing state-owned entities (SOEs) have drained the fiscus and resulted in two recessions in as many years. None of the top bankers expect things to get better any time soon; not as the coronavirus sows global panic.
“It’s not often that we see bank earnings go backwards,” said Nolwandle Mthombeni, an equity analyst at Mergence Investment Managers. “The more diversified you are, the more you can withstand any macro-shock across any region. The businesses that had some diversity from a geographic perspective saw the benefit of that in these results.”
While Standard Bank, FirstRand, Absa and Nedbank showed they can still turn a profit, deteriorating conditions in SA are taking their toll. Impairments shot up from historically low levels, profit targets are further out of reach, while jobs and branches are being cut as they seek to keep revenue growth ahead of any increases in expenses.
Barring Nedbank, which battled hyperinflation in Zimbabwe and took a charge to boost its stake in a Mozambican lender, all the other banks reported higher profits from the rest of Africa.
How the others fared:
- Absa reported a 16% increase in earnings from its African operations in the year to end-December to account for 22% of total profit.
- FirstRand’s investment banking unit Rand Merchant Bank had a 29% jump in pre-tax profit from its African business in the six months to end-December, with the region accounting for 23% of that division’s profit.
- Standard Bank’s rest of Africa business expanded 5% in 2019 to account for 31% of group earnings. Its personal and business banking subsidiary boosted earnings from the region by 53%, by adding 416,000 more customers to 3.4-million, opening branches and ATMs and pushing more digital transactions.
Even so, with headwinds building across Sub-Saharan Africa because of a slowing global economy, the banks need SA to unlock growth, said Adrian Cloete, a portfolio manager at PSG Wealth. Rolling blackouts are the biggest threat to the country, and the government has done little to fix power shortages since they emerged at least 13 years ago. Unemployment of 29% is also at risk of increasing.
“We really can’t afford to have all this load-shedding,” Cloete said. “We can’t afford not to do the right things. We’re now basically running out of time.”
Alan Pullinger, CEO of FirstRand, the country’s largest bank by market value, doesn’t think the economy will recover for three to five years, and lamented the slow pace of structural reforms by President Cyril Ramaphosa.
“The longer we find ourselves in this low growth environment the pressure and the sense of urgency increases,” Daniel Mminele, CEO of Absa, said in an interview. “Most of us would probably like a higher sense of urgency and to see things happening faster but one can’t live without hope.”
Some of the positives highlighted by the Absa CEO, who took up the post in January, is that the government is trying to address its wage bill. “It’s about engaging in those conversations, but obviously concluding them successfully, so that we can see implementation.”
The lenders are keeping costs in check by moving customers away from branches to digital channels, while also trying to sell more products to boost income. Absa expects revenue growth to outpace expenses in 2020.
“The longer-term potential in the rest of Africa remains positive for SA banks,” said Renier de Bruyn, an investment analyst at Sanlam Investment Management. That will eventually come “as the depth of financial markets improves on the continent and trade grows between Africa and the rest of the world”.