Banking sector results: big banks play catch-up
Standard and Nedbank have been saved by growth in Africa, but moribund SA makes them vulnerable to new players
As new digital competitors muscle in on their turf, it’s no surprise that more and more of the big legacy banks want to portray themselves as "agile".
Standard Bank, for example, boasts that new projects such as its new MyMo bank account and online home loans took "just" 16 weeks to launch instead of the customary 12 months.
Nedbank now boasts that through its Eclipse process it can bring new clients on board for life, instead of reregistering them for every new product. New clients can open a transactional account or take out a home loan in 20 minutes.
But the big banks, other than perhaps FNB, are simply catching up with the fully digital newcomers.
Would Nedbank really have introduced a pay-as-you-go zero-fee account without the threat from low-cost TymeBank?
Scrambling to keep up with banking’s youngsters comes at a huge cost too: in its half-year numbers released last week, Nedbank revealed that IT costs will peak at R9bn next year.
As it is, results from Nedbank and Standard Bank were pedestrian at best: Nedbank grew headline earnings by 2.6% to R6.87bn, while Standard Bank lifted its headline earnings 6% to R13.36bn.
Richard Hasson, co-founder of Electus Fund Managers, says he was disappointed that Nedbank and Standard Bank have been unable to show much, if any, earnings growth in their SA businesses. "With bad debts increasing and interest margins falling, the only lever they had was cutting costs."
Nedbank shaved off its cost base to record a cost to income ratio of 55.4%, from 55.8% in the six months to end-June.
Standard Bank pushed the same ratio down from 61.4%, but at 60.9% it is looking uncompetitive. It is not surprising, then, that Standard Bank has been the more aggressive in its cost cutting, earmarking 91 branches for closure.
Here, too, it has blundered.
"We made some mistakes," admits group CEO Sim Tshabalala. "We closed a branch close to an old people’s home at great inconvenience to our clients, apologised and reopened it."
Old Mutual Equities financials analyst Neelash Hansjee says Nedbank has implemented its own cost cuts more gradually, so it has not been as noticeable to the public.
Nedbank CEO Mike Brown says: "We saved a further R146m through our new operating model initiative, and we are close to reducing our branch footprint by 16%."
The bank has decommissioned 138 IT systems since 2010 and is aiming to end up with only 60 systems by next year.
Hansjee says Standard Bank has invested massively in a core banking system over the past 15 years — it is reflected as a R20bn intangible asset on the balance sheet, but its customer-facing systems such as apps remain inferior to those of Nedbank and FNB.
Neill Young, manager of the Coronation Financial Fund, says FNB’s app has very high user ratings, and the bank has made the most progress in building a competitive digital platform.
"With its strong revenues, FNB, and FirstRand as a whole, does not have to worry about its cost to income ratio or legacy issues as much as the others." But they all have a much larger cost base than newcomers such as TymeBank, Discovery Bank and Bank Zero.
When it comes to the bottom line, Nedbank’s earnings were driven by a 20% improvement in the rest-of-Africa business. Its main domestic franchises, corporate & investment banking (CIB) and retail & business banking, showed hardly any growth.
Standard Bank’s personal and business banking headline earnings in SA were flat too, at R6.1bn, but this was more than made up for by the 9% increase in earnings from its CIB to R6.2bn.
Once again, however, much of this was driven by the Africa regions, which account for almost half of the unit’s profit.
Tshabalala says: "Our main growth engine will be retail banking in the Africa regions. We have built the infrastructure, we now have to get the transaction volumes up to scale."
Earnings more than doubled, off a low base, to R471m in the half-year. Overall, the rest of Africa now accounts for 34% of Standard Bank’s headline earnings.
At Nedbank, CIB still makes up 48% of both group headline earnings and advances, though it remains a more domestic business than its Standard Bank counterpart.
And its managed operations in Southern Africa had a terrible half-year, sliding 74% mainly due to currency-related write-downs in Zimbabwe. Its 20% holding in Ecobank doubled its contribution to R264m, in spite of a 99% slump in earnings from Nigeria. Instead, it was rescued by a strong showing in Ghana and the Ivory Coast.
In both banks, corporate credit loss ratios are growing, though they remain subdued.
But Hansjee says a large corporate failure, such as Tongaat Hulett, Cell C or any one of several construction companies could change that quickly.
While neither Nedbank nor Standard is exactly raking it in, Young says he is happy to hold shares in both. "Nedbank trades on just a small premium to Absa, which doesn’t make sense. Absa has a long way to go in its IT journey and there are still risks from its demerger from Barclays."
He argues that Absa is on the back foot as its mortgage book unwinds.
Hasson, however, prefers Absa to all the other banks on valuation grounds.