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Junk downgrade seen as biggest threat to SA banks - survey

Nov 09 2016 09:42
Eugenie du Preez

Cape Town - Technological breakthroughs and demographic change - with Africa predicted to be the second most populated region on earth by 2050 with two billion inhabitants - were highlighted as significant forces that will continue to shape African banking in a survey by PwC released on Tuesday.

PwC's African Banking survey 2016, entitled Banking in Africa matters, shows the continent's banking industry is dynamic and has evolved substantially since its last survey in 2013.

Johannes Grosskopf, financial services leader for PwC Africa, said the report shows CEOs are committed to developing new strategies and reinventing their organisations to meet ever-changing demands.

"The number one focus for CEOs is the client – how to attract new customers and retain their existing clients in a customer centric eco-system," said Grosskopf.

The report shows striking differences between South African banks and banks operating in Kenya and Nigeria. The biggest concern for South African banks of local origin is the risk of a credit downgrade to junk status, as a sovereign downgrade would impact their ability to finance themselves in international markets.

They are also concerned about cyber security and, more broadly, IT resilience. Cyber attacks are a growing concern for CEOs and it was a major topic of discussion during interviews with them.

For foreign banks operating in South Africa, the biggest concern in 2016 was regulatory compliance. This is because they are already subject to international compliance regulations imposed by their parent company, most often located in a highly regulated environment, while at the same time having to comply with local South African rules. With sometimes conflicting deadlines, these extra layers of regulatory requirements remain a huge concern for them.

Currency volatility

Rand volatility is also becoming a challenge for foreign banks operating in South Africa. The diminishing value of the local currency has an impact on the revenues that these banks receive in rands; they also finance themselves in foreign currencies, often involving costs labelled in the currency of the parent company.

Banks operating outside South Africa consider capital management and liquidity risks to be the most pressing issues at the moment, which particularly affect banks operating in Nigeria and Kenya.

Disruption from technology is another a real game-changer for the banking industry, in particular Fintech start-ups. New entrants with more innovative and cost-effective solutions are considered a real threat to South African banks. But with trusted brands and existing customer bases they can use to remain relevant, traditional banks are set to remain very much part of the landscape.

A PwC Fintech survey indicates that 46% of global bank CEOs are engaging or considering to engage with start-ups through partnerships. Fintech remains a small market in Africa, but investments are expected to rise significantly from $200m in 2014 to $3bn by 2020.

Banking CEOs indicated that operational constraints are seen as the main obstacle to innovation within banks, mainly because of legacy infrastructure.

Customers key

Another focus area is customer centricity, clearly no longer just a buzz word to banking CEOs, who regard focus on the customer as of paramount importance. The objective is to move away from product silos, create cross-selling opportunities and enhance the client experience.

Banks are looking at technology, better use of data across the organisation and partnerships with Fintech companies to create eco-systems which maximise the customer experience.

This will have an impact on branches, with most respondents predicting a reduction in branches in the medium term.

Since the previous survey, the uncertainty in global markets seems to have curbed the appetite for international expansion. Instead, banks are now formulating strategies for domestic expansion based on diversification across all areas of financial services. The aim of this is to gain additional profit pools from existing clients.

Developing their African operations remains important with Nigeria, Kenya and Ghana viewed as growth markets.

Major South African banks expect to retain their return on equity of about 18%-20% in their retail and corporate and investment banking businesses in future years. In the long run, banking CEOs aim for cost-to-income ratios in the 45%-50% range.

pwc  |  banking  |  survey


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