EDITORIAL: Robust bank results should allay global risk fears

The strong profit growth SA’s big four banks have reported over the past couple of weeks has come as quite a striking counter to the doom and gloom around SA’s ailing economy. It’s in striking contrast too to the global panic about banks that’s been prompted in the past days by the failure of Silicon Valley Bank and two other small US banks.    

Yet the banks’ latest financials have a lot to tell us about the interest rate cycle and the way in which it benefits the banks when rates are rising, as they were last year, in the course of which the repo rate more than doubled from 3.25% to 7%. They have an important story to tell us too about the state of SA’s economy during 2022, and how robust its recovery really was before load-shedding wrecked it in earnest. And the details are particularly encouraging at a volatile time like this because they demonstrate the strength and soundness of SA’s big banks, and of their regulators, and highlight the contrasts with SVB and with current US banking regulation.

Complacency about the stability of the financial system, here or globally, is never wise, but whatever happens to interest rates, SA’s banks are clearly not in any danger of going the way of SVB — nor is there cause for concern about its banking system.

PwC calculates that the big four banks’ combined headline earnings grew 16.1% to more than R100bn in 2022, on strong increases in their revenues as well as well-contained costs. Their combined return on equity was 17.1% — well above the cost of capital. It clearly was a good year to be in banking in SA. And while interest rates were rising rapidly, this is a double-edged sword for the banks, one which on balance has been good for them. Consumers and some firms have come under pressure. Banks have therefore had to add significantly to their provisions for bad debts. At the same time, however, rising interest rates help their interest margins significantly because their loan books reprice faster to take account of the higher rates than their deposits do. Added to that is the fact that the capital they have to hold earns them a lot more thanks to the rise in rates. All of that helped to drive a 14.8% increase in net interest income across the banks, according to PwC. That was a key driver of the revenue growth that lifted their profits and enabled them to ensure they maintained or even improved their already well capitalised position. It enabled them also to pay record dividends.

Nor was it only higher interest rates and the so-called “endowment effect” from this that boosted the banks’ profits. Non-interest revenue also grew, by 12.9% across the banks. Much of that is from fees and transactions in an economy that was motoring along quite nicely for much of last year — until the escalating power crisis crushed it in the fourth quarter. How far that will erode the banks’ profits in the current year remains to be seen. Certainly they all flagged the huge risks to growth from Eskom, Transnet, greylisting and other woes. Some expect, however, that the strong momentum to invest in renewable energy and backup power could outweigh whatever happens to Eskom over the next couple of years.

The results demonstrate, however, that SA’s big banks have big buffers that should protect them and their depositors if the environment becomes more challenging and more risky. SA’s banking regulators have long insisted on this, and they’ve tightened up the rules and the scrutiny even more in the decade or more since the global financial crisis. Nor is this just the big banks: unlike in the US, where Trump-era legislators exempted smaller banks (such as SVB) from some of the regulatory oversight that applied to bigger, more systemically important banks, in SA the banking regulator keeps an eagle eye on all the banks. Crucial too are banks’ business models and how far these diversify their risk, on the lending side and the funding side.

SA’s big banks benefit from their diversity of business across customer segments and across geographies, in SA and the rest of Africa, and they rely on a variety of sources of funding. SVB relied on Silicon Valley’s rich tech sector for most of its funding, and since it didn’t do that much lending to customers, it invested most of its funds into US government long bonds — which have plummeted in price as interest rates have risen. It was a recipe for vulnerability. It was not a recipe which SA’s big banks have followed. But with markets and regulators now in panic mode globally, local bankers will be watching for any fallout.