This year has been a good one for South Africa’s four largest banks despite an emerging market crisis and an increase in the domestic interest rate, according to a recent report in the Mail & Guardian
The report, based on Pricewaterhouse Coopers’ (PwC) latest analysis of South African banks, stated that the optimism in the industry suggests that there is more resilience in the economy than generally believed. This is attributed to a better-off consumer, thanks to low interest rates set by the Reserve Bank, along with a decrease in the number of bad debts – major banks are writing off less than they have in previous years. Banks also have their costs under control, despite inflationary and exchange rate pressures, and the banks have continued to attract new customers with improved loyalty programmes, continued corporate lending and new business from the rest of the African continent.
The Big 4
Barclays Africa, First Rand, Nedbank and Standard Bank have delivered solid performances in recent years. Although lower impairment charges have helped the banks’ bottom line, the cycle is expected to turn as the repo rate (the rate at which the Reserve Banks lends money to banks) begins an upward trend.
All of South Africa’s major banks have stated that they are taking a measured approach to scale back on unsecured lending – a segment of the market in which the major banks have found it difficult to achieve significant growth while balancing this growth against risk appetite levels.
African Bank fallout
The banking sector has experienced a minimal impact from the collapse this year of African Bank, according to EY’s banking sector confidence index. Retail banking confidence improved to 50 (out of 100) in the third quarter of this year, from 46 in the second quarter and 38 in the first quarter with revenue and profits up in the double-digits.
Although all banks reported that they have tightened unsecured lending in the lower end of the market, growth in credit cards continued to climb.
PwC’s analysis of the Big Four’s results for the six months to June 30 showed that the collective card debtors’ book grew 7.1% to R95.9 billion over the six-month period, compared with a 0.7% growth in mortgage loans to R850 billion. Instalment and lease finance grew 5.2% to R385.4 billion over the six-month period.
The Capitec challenge
Last year, All Media and Products Survey (AMPS) data on the South African banking sector showed that Capitec had nudged Nedbank out of fourth place, suggesting that sector now boasted a Big 5 .
Interestingly, the AMPS data recorded the amount spent on marketing by South Africa’s big banks (this included Capitec) from 2012 to 2013 and revealed that the five banks spent a total of R1.75 billion, with FNB spending the most at R562.3 million without increasing its market share. In contrast, Capitec, with the lowest marketing spend of R93.4 million, managed to boost its market share.
Capitec’s response was: “It’s not time to state that we have comfortably surpassed Nedbank yet (in terms of market share) but it is nevertheless clear that we are now becoming a significant threat to the bigger banks with a much lower advertising spend on our side.”
In their Consolidated Financial Statements a year later – for the year ended 28 February 2014 – Capitec confirmed that its unsecured credit business had recently hit a bump in the road. The bank, which has 5,4 million active clients, put this down to a deterioration of their loan book for the year.
In order to keep unsecured lending under control, Capitec has tightened its credit criteria which effectively means that fewer loans are approved, the size of loans is decreased and repayment terms shortened.
The smaller bank alternative
In March 2013, Capitec reported that its total client base increased by 26% to 4.7 million active clients in the previous financial year (3.1% were cell phone banking clients). They also stated that the significant growth in new clients depositing their income with the bank, was a clear indication that the public trusted Capitec to meet their core banking needs, and that their unique banking model was highly compelling to the South African customer.
The bank’s confidence, that it would continue to increase its market share going forward, seems to have been well-founded because despite Capitec’s credit lending business not doing well, the bank’s general performance has been rosier in 2014. Capitec’s headline earnings per share went up 15% to 1 752 cents, while headline earnings were up 27% to R2 billion.
Since 2001, when SA Home Loans pioneered an alternative, non-bank method of funding in South Africa, the continued (and growing) demand for loans, as demonstrated by the loan provider ‘Wonga’ creating a South African leg to their business, shows that there is still a place in the market for private lending companies to offer short-term loans to customers who do not meet commercial banks’ credit criteria. Payday loans and short-terms loans online, give customers some financial breathing room uncertain economic times.