Digital banks threat looms
Transactional income will feel the pinch, but big banks have businesses which won’t be hit, at least in the short term
The 2018 bank results will be the last in the era of "business as usual".
Absa and Nedbank’s earnings increased by 3% to R16.1bn and R13.5bn respectively. Standard Bank, more exposed to high-margin African markets, achieved 6% growth to R27.9bn. Even these modest numbers might seem like a stretch into the future as new banks including TymeBank, Bank Zero and Discovery Bank come online.
The soft underbelly is transactional income, which is sure to come under pressure from competition. TymeBank, for example, does not charge a fee if clients draw money at one of the tills at a Pick n Pay or Boxer store, and just R2 at other points. Standard Bank alone made R4.3bn from its transactional products, more than from business lines such as home loans, cards or even personal loans.
Harry Botha, banking analyst at Avior Capital, says SA banks’ transactional income is vulnerable to fee cuts in the next three years due to competition. If they don’t respond quickly enough then customer losses will "probably be a problem in three to five years".
A big chunk of Nedbank Retail’s R12.6bn in noninterest revenue is in vulnerable transactional fees, as is the case with Absa Retail’s R14.3bn.
Standard Bank CEO Sim Tshabalala defends these profits.
"A responsible banker will cover his fixed costs through noninterest revenue, mainly fee income," he says. "And we have a very large fixed cost base. I accept it gives the new digital-focused businesses a big advantage when it comes to overheads."
He is not exaggerating. Standard Bank has a huge R60bn cost base, of which less than R8bn is in variable pay.
In their favour, the big universal banks have a portfolio of businesses which won’t be affected by the newcomers, at least in the short term. Absa finance director Jason Quinn says there will continue to be income from investment banking deals, foreign exchange trading as well as capital-light activities such as merchant-acquiring by the card business.
For Standard Bank, the corporate and investment banking division (CIB) makes up 44% of income. It is not showing much growth in SA, with just 1% loan growth, but 33% in the rest of Africa — not that fintech players won’t emerge to take it on in other markets. But for now the big four banks (plus Investec) have a cosy cartel when it comes to investment banking.
It was not an easy year, with muted deal flow. Standard Bank CIB’s earnings were down 2%. In order to improve productivity, 1% of the heads were let go.
But it is a high-quality business, with bad debts of just 0.2%. Among the highlights were the listing of Vivo Energy and Libstar as well as arranging the sale of 25% of SA Taxi Finance Holdings to Santaco.
Nedbank is the bank most dependent on wholesale business — it accounts for 50% of group headline earnings, or R6.7bn. Unlike the Standard Bank and Absa CIBs, they were up for the year by 7%.
"We are still the leaders in commercial property and we have taken that position in renewable energy deals too," says Nedbank CIB boss Brian Kennedy.
"And we are comfortable with the risks in commercial property," says Nedbank group CEO Mike Brown. "In spite of the noise about certain listed counters, the security in loan-to-value terms on debt held by banks in their properties is more than adequate."
Nedbank CIB also won some large corporate and institutional clients including Sappi, Imperial and the metros of Cape Town and Ekurhuleni (the East Rand).
In spite of the efforts of previous heads such as John Vitalo and Stephen van Coller, Absa CIB remains an also-ran. It continues to be affected by the problems at Edcon — from which it acquired the debtors’ book — and credit impairments were up 76% to almost R1bn. But it still represents headline earnings of R5.9bn, business that is out of reach of the new banks. Even Capitec, once it takes over business bank Mercantile, will just be nibbling at the edges.
But banks now realise that they need to make their retail businesses relevant. It has been a benign environment, with low bad debts. Nedbank’s retail and business banking earnings were up 6.4% on a like-for-like basis, excluding the impact of the new accounting standards. Standard Bank Personal & Business Banking was up by 10% and even Absa’s was up 2%.
One of its key growth engines was deposits, which increased by 11%. But this is highly vulnerable to the new banks as well as the revived African Bank and, in due course, Postbank.
René van Wyk, Absa’s caretaker CEO, says Absa has been an innovator in the digital space. "We were the first to introduce ChatBanking on WhatsApp, and introduced Timiza in Kenya which allows customers to save and borrow money without having to visit a branch." It was also the first bank to introduce Samsung Pay.
Says Tshabalala: "At Standard Bank we are reorientating the bank around the customer, with our own group mobile network operator and strong growth in our Instant Money volumes. Branches will remain important as places for problem-solving activity, to discuss a financial plan or a will, but not a place to get a statement or draw money."
Standard Bank has reduced its branches in SA by 11%, to 629, and its total square meterage by 21% — to 367,000m².
Its competitors are on the same path.
Nedbank looks the most ambitious of the three in digital. "We realise that client ‘onboarding’ is a hassle," says Brown, "as prospective clients have to produce the same documents every time they buy a new product from the bank. Our aim is that once you are a Nedbank client you won’t have to keep repeating the process. And I certainly hope the initial onboarding will also be painless."
Brown says technology alone is no substitute for people and talent. No doubt in response to Discovery Bank, Nedbank is introducing a new rewards system. It will replace a crude "points for swipes" system with a rewards system based on client behaviour — rewarding those who pay their loans on time, for example.
The big banks have also aimed to diversify through nonbanking interests.
Absa has led the way with a simple but effective bancassurance model.
Botha says bancassurance and wealth are starting to get more attention in banks due to the slow growth environment and due to the data the banks have, which can be used to improve long-and short-term insurance pricing.
"Excluding the impact on market levels (on assets under management), I think bancassurance revenues will probably grow at double the pace of traditional banking revenues — so, high teens for the next five years," he says.
With every Absa home or vehicle loan an Absa Life credit life policy is offered — though customers have the right to use another provider.
Most accept the in-house deal, which explains why Absa made a healthy R870m from life insurance.
It is the most profitable business in its wealth investment management and insurance cluster, under Nomkhita Nqweni.
"Absa will probably make industry home loans less profitable — we’ve already seen new business margins come down," says Botha.
"The current level of NPLs [nonperforming loans] or stage 3 advances is still cyclically low, probably 15%-20% below the normalised level," he adds.
Short-term insurance is a smaller part of Absa, but still a good business. Earnings were up 32% to R299m on an excellent 9.6% underwriting margin.
For a combined wealth and asset management business, this unit’s R440m was quite modest — though it was up 28% on 2017.
Absa must be missing its most high-profile client, former Steinhoff boss Markus Jooste. The bank used to boast about managing his corporate and personal affairs. And Absa has been trying to sell its institutional asset manager for a while but can’t find a buyer.
Nedbank Wealth under Iolanda Ruggiero is the reverse of Absa, with a modest-sized insurance business and more substantial wealth and investment businesses built on the legacy of BoE and Syfrets. It is perhaps a sad indictment that while earnings of the local wealth business are flat, its international business is growing fast, with advances up 30%.
It is harder to pull a consolidated number from Standard Bank as it conducts part of its wealth management through Liberty and part through its wealth division under Margaret Nienaber (yes, all three heads of wealth are women). Confusingly, wealth and investments is a subdivision of wealth, not the other way round. Melville Douglas, the private client manager, is the flagship business in this unit.
Credit life is vulnerable. There are already efficient providers undercutting the banks’ often exorbitant credit life charges.
But Tshabalala remains optimistic. "Consumer activity is improving and debt-to-income ratios are much lower." He does not expect banks to become utilities, with all the added value coming out of the fintechs. "With our infrastructure, data and resources we are well placed to improve the customer experience."
Coronation banking analyst Neill Young says after the recent run in bank shares the house is not adding materially to its bank holdings as it has recently accumulated chunky holdings in Standard Bank and Nedbank.
He says prospects for all the banks are limited prior to the elections.
The fourth member of SA’s big banks was FirstRand, which owns FNB, Wesbank and investment bank RMB. On Tuesday, FirstRand reported a 7% rise in its calculation of "normalised earnings" to R13.3bn for the six months to December. CEO Alan Pullinger attibuted this to a "strong growth in customers, transactional volumes, advances and deposits".
Impressively, FirstRand’s return on equity is now at 22.3%. This is the highest of the big four banks, trumping Standard Bank (18%), Nedbank (17.9%) and Absa (13.4%).