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Johannesburg – South Africa’s major banking groups reported solid results for the first half of the year, delivering value to shareholders which compares favourably to European counterparts, according to PwC Africa.
PwC published its analysis on the results of the six months to end-June 2016 for the following banks: Barclays Africa Group Limited [JSE:BGA], FirstRand [JSE:FSR], Nedbank [JSE:NED] and Standard Bank [JSE:SBK] on Wednesday.
“It is exceptional that our banks have been able to increase operating income by what they have in the last six months,” said Johannes Grosskopf, financial services industry leader for PwC Africa. “Banks are finding it difficult to navigate in the current macroeconomic environment. What we see happening in the macro-economic environment comes through in results.”
The banks posted combined headline earnings of R34.6bn - up 5.7% compared to the same period in 2015. Total operating income lifted 13.3% and operating expenses rose 12.6%.
“Banks are doing exceptionally well in terms of delivering shareholder value. They still deliver value to shareholders,” said Grosskopf. This is measured by the economic spread between the return on equity (ROE) and the cost of equity.
This measure at 3.6% - although marginally down from the second half of 2015, when it stood at above 4% - indicates that major banks’ performance compares favourably against their European counterparts, he said.
Economic spread
European Global Systematically Important Banks (G-SIBS) have remained within negative territory in the -6% to -10% range. African banks have managed to outperform European banks which have had to contend with a zero rate environment.
“Also, European capital levels are not similar to those in Africa. African banks have higher capital levels than their European counterparts,” said Grosskopf.
Combined ROE fell slightly to 17.6% for the first half of 2016, compared to 18.2% for the first half of 2015. FirstRand’s ROE is a significant outlier to the other banks at 24.6%.
Almost 57% of the total operating expenses of the major banks relate to staff costs. “We expect this increasing staff cost trend to continue, as specialist and skilled resources are employed to assist the banks with the IT transformation to help meet the heightened levels of regulatory compliance required,” stated Grosskopf.
The cost to income ratio remained stable at 55%, added Louwrens van Velden, associate director. Key factors contributing to the increase in operating expenditure are linked to expenditure by banks directed towards IT changes. The foreign exchange rate also impacted the cost line. “The rand lost 29% against the US dollar for the first six months of the previous year,” he said.
“Development costs influence operating expenditure, but the cost now will lead to benefits in the future,” said Grosskopf.
Impairment charges increased significantly from previous years. The combined income statement impairment charge grew by 26.8% against the first half of 2015 and 29.3% against the second half of 2015.
Net interest income grew 15.9%. The combined net interest margin of the major banks increased almost 4.7% compared to the first half of 2015, and about 4.4% compared to the second half of 2015.
Net interest income up 15.9%
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