Major bank’s profits surge post Covid, a PwC analysis finds

view original post

South Africa’s major banks, combined, recovered to record, an above pre-Covid profit in the first half of their 2022 financial year, but they face increased risks in the second half.

The major banks, Absa, FirstRand, Nedbank and Standard Bank lifted headline earnings 19 percent to R48.3bn in the first half buoyed by a post-Covid resurgent economic recovery in the first quarter and slower momentum in the second three months, PwC’s analysis showed..

Story continues below Advertisement

The credit loss ratio fell to 77 basis points from 82, while the cost to income ratio fell marginally to 54.1 percent from 55.9 percent.

The net interest margin widened to 416 basis points from 403 basis points.

PwC Africa Banking and Capital Markets Partner Rivaan Roopnarain said the first quarter GDP figure reflected an economy that returned to pre-pandemic levels, boosted by the lifting of lockdown restrictions, strong terms of trade and high commodity prices.

More on this

However, in the second six months, the reintroduction of load shedding, flooding in KwaZulu-Natal, increased labour action, elevated inflation globally and domestically, slow growth and heightened geopolitical tensions eroded momentum.

“Armed with important lessons learned through the pandemic, and having refined overall bank strategies as a result, the major banks spent the first half of 2022 focused on the customer experience through continued digitisation and on driving the efficient execution of strategic priorities,” Roopnarain said in a statement.

He said the outlook for the second half was expected to be volatile and uncertain.

Story continues below Advertisement

Geopolitical risks would add to supply chain pressures in the developed world.

”A dramatic rise in inflation coupled with recessionary risks across several economies is serving as the basis for the most rapid monetary policy tightening in decades,” he said.

He said the fact that the major banks collectively now had more capital and risk provisions than ever before should help to shield them against economic headwinds in the second half.

Story continues below Advertisement

Key themes for the banks over the first half included: Resilient consumer and transactional activity, positive endowment effects of higher interest rates and balance sheet growth, which translated into strong revenue gains across retail, business and corporate banking franchises.

There was also better than expected claims experience aided revenues from insurance activities — a growing part of the major banks’ revenue base. Combined headline earnings surpassed pre-pandemic levels, while balance sheet metrics remained robust.

Credit quality continued to improve. Non-performing loan stock reduced marginally while credit coverage ratios were maintained at historically prudent levels.

Story continues below Advertisement

Concentrated cost management efforts continued, with expense growth slightly above average CPI growth.

Competition among the major banks remained “intense, amplified by new entrants and niche lenders, with a distinct focus towards further building out small medium enterprise and business banking strategies now increasingly evident,” said Roopnarain.

A recent joint report by the International Finance Corporation and the World Bank estimated that “the unseen sector” comprising micro, small and medium enterprises constitutes more than 90 percent of all formal business in the country, employs 50-60 percent of the workforce and contributes 34 percent of GDP.

At the banks key elements of management attention focused on digital channel innovation as customers conduct a wider range of more routine banking and ancillary activities online.

Other areas of strategic management focus in the period included further digitising IT estates and manual back office processes, limiting system downtime and improving overall customer experiences.

The intense stakeholder focus on more comprehensive sustainability reporting and ESG practices presented sources of strategic opportunities for the banking industry.

PWC said the country’s potential greylisting by the Financial Action Task Force (FATF) represented a worrying prospect.

Implications of a greylisting were broad, including increased monitoring by FATF and more onerous reporting requirements by correspondent banks, possible restrictions on correspondent banking relationships and adverse impacts on funding costs.

[email protected]

BUSINESS REPORT