www.pwc.com/za
Reinforcing
collective strength
and stability
South Africa –
Major Banks Analysis
PwC’s analysis of major
banks’ results to
31 December 2010
March 2011
II South Africa – Major Banks Analysis
Table of Contents
Overview2
Combined results summary
4
Economic outlook
6
Net interest income
8
Non-interest income
9
Efficiency
10
Adapting to new realities in a post-crisis environment
12
Asset quality
14
Capital and funding
18
Key banking statistics – Annual
22
Key banking statistics – Semi 2010
23
Key banking statistics –Semi 2009
24
Industry statistics
26
Contact details
29
South Africa – Major Banks Analysis 1
Overview
Annual combined headline earnings up 12.9%
Average return on equity 14.5%
Bad debt expenses down 31.2%
Core earnings down 2.2%
Efficiency down 5.0%
Bank results –
overview
Revenue growth is
challenging
South Africa’s big four banks’ or
major banks’ (Absa, FirstRand,
Nedbank and Standard Bank) fullyear results for the past year reinforce
once again the collective strength
and profitability of the South African
banking system. Although there
were differences in the performances
of the individual banks, combined
headline earnings increased by 12.9%
to R33.9bn on an annualised basis.
The average return on equity was
14.5%, compared to 13.3% in 2009.
The largest single contributing factor
to profit growth was the reduction in
bad debt expenses (down R10.9bn
or 31.2%) as lower interest rates
helped reduce the inflow of new
non-performing loans and general
economic conditions improved.
The revenue growth outlook is less
rosy, and this points to the challenges
faced by the banks as they come
to grips with the new post-global
financial crisis (GFC) reality, referred
to by many as the ‘new normal’. There
are at least five separate sources of
pressure on revenue for the banks,
evident from their results:
• Margin pressure as historically low
interest rates are maintained.
• Low growth in both demand and
availability of credit given the
strength of economic activity in
general.
• An increased cost of funding,
as banks’ funding profiles are
lengthened; with no reprieve on
the cost of retail funding through
deposits.
• Subdued trading income, driven
by continuing low transaction
volumes and limited risk taking.
2 South Africa – Major Banks Analysis
• Pressure on fee income, partly due
to less lending activity.
All of these trends suggest that the
pressure on bank revenues will
continue.
Expenses rose 11.5% in 2010 and
consequently, cost-to-income ratios
came under pressure, rising to 58.6%
from 55.8% in 2009. All this means
that core earnings (earnings before
bad debt expenses) decreased by
R1.7bn (2.2%).
No wonder then, that banks are
giving serious attention to cost
control. All banks have stated that
cost control and efficiency remain
among their top priorities for the
current year as they battle to get their
efficiency ratios down to pre-2009
levels. However, political turmoil
and other inflationary pressures
will make this year tough going. But
cost control is an imperative – and
is one of the reasons why the banks’
investment in technology to improve
efficiency is essential as they seek to
reduce costs.
The regulatory
environment continues
to play an important
role
The banks are also having to cope
with a period of unprecedented
regulatory change, together with
levels of political scrutiny not seen
before. Higher liquidity and capital
requirements under Basel III will
inevitably increase funding costs
and put further pressure on returns
on equity. In South Africa’s case
in particular, it has been widely
publicised that given the shortage
of highly liquid instruments and
the structural imbalances in the
economy, many banks will likely be
unable to meet the new liquidity
requirements. As such, it is a positive
step that the banks, regulators and
National Treasury are working
together to come up with the best
possible solution for South Africa.
In addition to dealing with the
requirements of Basel III, banks
will have to contend with the new
‘Twin Peaks’ approach to financial
regulation as announced by the
Minister of Finance in the recent
Budget Speech. Under the revised
regulatory framework, the South
African Reserve Bank (SARB)
will be given lead responsibility
for prudential regulation and the
Financial Services Board (FSB) for
consumer protection. As part of this
redistribution of responsibility, the
mandate of the FSB will be expanded
to include the market conduct of
retail banking services, including
developing principles for how banks
should set their fees, how these
fees should be reported and what
constitutes fair behaviour. Within the
FSB, a retail banking services market
conduct regulator will be established.
This new regulator will focus on
structural market issues and banking
fees and will work closely with the
National Credit Regulator, which has
a complementary role in regulating
the extension of credit. The SARB’s
mandate for financial stability will
be underpinned by a new Financial
Stability Oversight Committee, cochaired by the Governor of the SARB
and the Minister of Finance.
The Minister 0f Finance surprised some
by saying, “I have met with the chief
executives of our banks to take up this
issue (bank charges, the complexity of the
payment system) and I believe it is time
to put in place measures that will ensure
that banking charges are fairly set, are
transparent and do not create undue
hardship.”
Banks could have supposed that the
new framework would be largely
similar to what they have been
accustomed to, but for the mention
of bank fees in the new framework.
Most banks rely increasingly on noninterest income (fees) to bolster their
revenue lines and any regulatory
changes on this front would be a
severe blow.
Given the regulatory uncertainty, it is
not surprising to see capital adequacy
ratios creeping upwards, with the
average for Tier 1 now at 12.8%
(2009: 12.4%), which is well north of
the minimum required. Most banks
are cautious when dealing with the
question of what will happen to their
excess capital. This is likely to remain
an issue until there is more clarity on
what the new rules will be.
Looking ahead
South Africa has been fortunate in
that our banks avoided much of the
fallout from the GFC experienced
by banks elsewhere. However, our
consumers and households were
similarly over-leveraged and as
this slowly returns to normal, they
are looking to be more cautious in
relation to debt; which was a steady
source of both revenue and profit
growth for the banks over the past
two decades. Increased demand for
commercial and corporate borrowing
may help offset this.
In a deleveraging world, and with
new capital and funding restrictions,
South African banks will need to be
more selective in finding new ways
to connect with customers to drive
revenue and profitable growth.
Large investments in technology to
improve efficiency are clearly one
vehicle for this – and indeed the
depth of customer information that
will be available in a technologically–
enabled banking system will enable
extraordinary precision in both
marketing and credit assessment. The
banks are pushing the mobile handset
revolution for the same reasons as
this is seen as a potentially high
growth area that does not require
significant infrastructure investment,
given that the target market was
previously unbanked. In addition,
the big four banks are increasing
their focus on the lower income
sectors as the battle for market share
intensifies, given the importance of
growth in this sector.
In the pursuit of growth, offshore
expansion into Africa remains very
much in play, with each bank taking
a different approach. Suffice to say,
history has shown that this is an
area where a precise understanding
of the chosen market - in contrast
to ubiquity of scope and reach - is
fundamentally important.
South Africa – Major Banks Analysis 3
Combined results summary
Combined annual results
Rm
2010
2009
2010 v 2009
2H10
1H10
2H10 v 1H10
Net interest income
85,279
82,341
3.57%
43,338
41,941
3.33%
Non interest income
105,322
97,951
7.53%
54,787
50,535
8.41%
Total operating income
190,601
180,292
5.72%
98,125
92,476
6.11%
Total operating expenses
-116,468
-104,467
11.49%
-61,550
-54,918
12.08%
Core earnings
Impairment charge
Other income/(expenses)
74,133
75,825
-2.23%
36,575
37,558
-2.62%
-24,262
-35,254
-31.18%
-11,063
-13,199
-16.18%
1,206
1,600
-24.63%
618
588
5.10%
Income tax expenses
-13,517
-10,706
26.26%
-7,155
-6,362
12.46%
Profit for the period
37,560
31,465
19.37%
18,975
18,585
2.10%
Attributable earnings
40,697
29,435
38.26%
23,884
16,813
42.06%
Headline earnings
33,914
30,029
12.94%
17,070
16,844
1.34%
Return on equity
14.5%
13.3%
14.8%
14.3%
1.1%
0.9%
1.1%
1.0%
Return on average assets
This analysis presents the combined
results of the major banks in South
Africa (Absa, FirstRand, Nedbank and
Standard Bank). Investec, the other
major player in the South African
market, has not been included in
this comparison due to its unique
business mix, different reporting
currency and period.
The results of the banks analysed
contain a number of complexities
that require explanation. In order to
present information that reflects the
underlying trends and performance
of their businesses going forward, the
banks seek to eliminate once-off or
non-recurring items in order to assess
their performance in the course of
normal operations. This includes the
reinstatement of gains and/or losses
on the banks own shares held by
group entities that are not permitted
to be recognised under International
Financial Reporting Standards
(IFRSs) (known as Treasury shares)
which result from hedged share
remuneration schemes, own shares
purchased to hedge derivative
transactions entered into with
4 South Africa – Major Banks Analysis
trading counterparties, and shares
owned by policyholder funds.
A number of banks refer to these
adjustments as ‘normalised’
adjustments. We have used these
normalised results in our analysis in
this document.
Headline earnings is a way of
dividing the IFRS-reported profit
between re-measurements that are
more closely aligned to the operating
and trading activities of the entity,
and the platform used to create those
results.
For South African banks this gives
rise to a number of adjustments,
including the removal of gains and
losses relating to hedge contracts
that do not meet the requirements
of International Accounting
Standard 39 for hedge accounting
or are not fully effective, permanent
impairments of equity investments
and goodwill, and gains or losses
on transactions outside the normal
course of business such as disposals
of business investments.
FirstRand in particular had a
significant headline earnings
adjustment in the last six months of
2010 as it concluded the unbundling
of Momentum to MMI Holdings
shareholders. This impacts the
comparability of numbers as the
comparative earnings of Momentum,
in accordance with IFRS 5, are
excluded from the amounts presented
and disclosed as assets held for sale.
Combined results of six month periods
Combined results
Rm
Net interest income
Non-interest income
Total operating income
Total operating expenses
Core earnings
Impairment charge
Other income
Income tax expenses
Comparative movement
2H10
43,338
54,787
98,125
-61,550
36,575
-11,063
618
-7,155
1H10
41,941
50,535
92,476
-54,918
37,558
-13,199
588
-6,362
2H09
42,411
52,611
95,022
-55,023
39,999
-15,539
176
-6,472
1H09
39,930
45,340
85,270
-49,444
35,826
-19,715
1,424
-4,234
2H
2.2%
4.1%
3.3%
11.9%
-8.6%
-28.8%
251.1%
10.6%
1H
5.0%
11.5%
8.5%
11.1%
4.8%
-33.1%
-58.7%
50.3%
Profit for the period
18,975
18,585
18,164
13,301
4.5%
39.7%
Attributable earnings
Headline earnings
23,884
17,070
16,813
16,844
16,293
16,750
13,142
13,279
46.6%
1.9%
27.9%
26.8%
Return on equity
Return on average assets
14.8%
1.1%
14.3%
1.0%
14.8%
1.1%
12.0%
0.8%
-0.4%
8.3%
19.3%
28.2%
South Africa – Major Banks Analysis 5
Economic outlook
By Dr Roelof Botha
The global economy entered 2011
with the knowledge that the recovery
had gained substantial momentum
during the second half of the
previous year.
Within five quarters of the official
end of the recession, annualised real
economic growth surged to above
or close to its long-term potential in
several high-income countries and
emerging markets.
Although it is evident that a number
of European countries may require
fiscal discipline for at least two to
three fiscal cycles (including Greece,
Portugal, Ireland and Spain), the
European Union’s initial bridging
facility of €750bn has already
provided hope for a relatively swift
return to financial soundness for the
Eurozone as a whole.
Global recovery wellentrenched
Further proof of the sustainability
of the global economic recovery
from the short but sharp recession
comes from the news of a return to
formal sector job creation in most
economies (including the US).
The World Bank estimates global
Gross Domestic Product (GDP)
to have increased by 3.9% in
2010, whilst authoritative global
macroeconomic forecasting agencies
are forecasting healthy growth rates
for virtually all of the emerging
markets and the largest high-income
countries.
6 South Africa – Major Banks Analysis
GDP growth forecasts for 2011 for selected high-income countries and
emerging markets
High-income countries
(%)
Emerging Markets
(%)
Sweden
4.2
China
8.9
Australia
3.3
India
8.6
US
3.0
Chile
5.9
Germany
2.4
Brazil
4.5
UK
1.9
Turkey
4.5
France
1.5
Singapore
4.1
Japan
1.4
Russia
4.0
Spain
0.4
South Korea
3.9
Ireland
-1.1
South Africa
3.7
Greece
-4.1
Mexico
3.0
Sources: Economist poll, national budgets
Economy poised for higher growth
despite some obstacles
Welcome recovery of
credit extension
The stubbornness of credit extension
in responding to the return to positive
real GDP growth (which occurred as
early as the third quarter of 2009),
clearly defeated the objective of
monetary policy during 2010. The
most accommodating monetary
policy in almost four decades was
called into being by the lethargy of
money supply growth and private
sector credit extension over the past
two years.
The SARB even expressed its concern
at the slow rate of recovery of the
economy in a recent policy statement,
specifically singling out the “strict
lending criteria” applied by banks
as a constraint on the growth of
household consumption expenditure.
Growth in credit extension by
banks started slowing in 2007 and
continued decelerating until it
reached negative territory in 2009.
The stagnation in loan activity by
financial institutions was consistent
with the fairly dramatic decline in
money supply growth during 2009.
Recovery of private sector credit extention
(percentage annualised growth)
25.0
20.0
15.0
10.0
5.0
0
Q3
Q4
2007
Q1
Q2
Q3
2008
Q4
Q1
Q2
Q3
Q4
Q1
Q2
2009
Q3
Q4
2010
Source – SARB
According to the SARB, the
continuation of subdued money
market activity during the first half of
2010 was related, inter alia, to a low
inflationary environment, relatively
low returns on money market
deposits and impaired balance sheets
in both the corporate and household
sectors.
A welcome return to positive growth
in credit extension by the banking
sector was made in the second
quarter of 2010, although the rate
of expansion has remained rather
muted. All types of bank loans began
recording positive growth during the
third quarter of 2010.
Growth drivers
Since the second half of 2010, the
equity market has also witnessed
higher levels of activity, with its value
of market capitalisation growing at
healthy rates. This growth reflects
the impact of lower bond yields,
lower money market rates, higher
profit expectations and progress in
reducing the government’s budget
deficit.
Prospects for a swift return to the prerecession economic growth trajectory
of above 4% have been buoyed by
the presence of a number of rather
impressive macroeconomic growth
drivers, including the following:
• Prospects for relatively low
inflation during 2011
• A return to healthy real growth
rates for household disposable
incomes
• The lowest money market interest
rates in almost four decades
• An upward trend in commodity
prices (particularly metals,
minerals and oil)
• A continuation of the recovery of
inventory levels
• Continued progress with
government infrastructure
programmes
• An expansionary fiscal policy
stance, particularly in terms of job
creation initiatives
• A return to formal sector
employment creation
Against these positives, however,
the potential impact of higher oil
and commodity prices fuelled by the
political turmoil in the Middle East
should be considered.
South Africa – Major Banks Analysis 7
Net interest income
Combined results
Gross loans and acceptances (Rm)
Net interest margin (% of average interest
bearing assets)
2H10
1H10
2H09
1H09
2,215,547
2,205,122
2,179,754
2,179,665
3.8%
3.7%
3.6%
3.4%
Net interest income
Rm
800,000
%
4.5%
700,000
4.0%
600,000
3.5%
3.0%
500,000
2.5%
400,000
2.0%
300,000
1.5%
200,000
1.0%
100,000
0.5%
0.0%
1H09 2H09 1H10 2H10 1H09 2H09 1H10 2H10 1H09 2H09 1H10 2H10 1H09 2H09 1H10 2H10
ASA
Gross loans and acceptances
FSR
NED
SBK
Net interest margin (% of average interest earning assets)
Source – PwC Analysis
Net interest income remains a
principal revenue driver for the major
local banks, contributing on average
46.6% of their total annual income.
Although the total interest earned
has increased to R43.3bn from
R41.9bn in 2H10, and to R85.3bn
from R82.3bn for the full year, net
margins continued to be impacted
negatively by the significant drop
in the repo rate and the resulting
endowment effect as well as
increased funding costs. The net
interest contribution to total income
before impairments decreased to
46.2% for 2H10, from 47% in 1H10.
Contributing factors to decreasing
bank interest margins are:
• Endowment effect – Decreasing
interest rates have a significant
impact on bank earnings as the
interest received on assets does not
fully compensate for the increased
costs associated with deposits and
longer term funding.
8 South Africa – Major Banks Analysis
• Deposit re-pricing – To attract
funds from both new customers
and to extend the term of the
funding profile, banks continue to
pay increased rates on deposits.
• Limited asset growth – Loans
advanced have started to increase
again but growth remains subdued
and below the levels experienced
prior to the GFC.
There has, however, been some relief
on bank margins, as a result of:
• Asset re-pricing – Re-pricing
related to credit risk provided
some relief for bank margins.
However, by now much of this
asset re-pricing activity should
have been completed and its
impact fully reflected in interest
income.
• Credit impairment – A significant
reduction in credit impairment as
a result of the relief afforded to
consumers by lower interest rates
improves their ability to repay
debt. This is evidenced by lower
levels of interest in suspense.
• Retail deposits – Relatively higher
deposit volumes of traditionally
cheaper retail deposits.
• Hedging activities – Some banks
have successfully protected
margins by hedging portions of
the endowment impact, but there
is a concern that as rates start to
increase this may slow the net
interest income they are able
to produce as their hedges turn
against them.
Non-interest income
Increased reliance on
non-interest income
Non-interest income for 2H10 was up
8.4% on 1H10 and 4.1% up on 2H09.
It now represents 53.8% of total
income, up from 53.0% in 1H10. This
demonstrates the increased reliance
of banks on non-interest income as a
source of earnings.
Net fee and
commission income
Net fee and commission income
increased by 9.0% on 1H10 and
increased by 5.8% on 2H09. This
growth is largely attributable to
transactional volume growth,
coupled with inflationary increases
offset by lower knowledge-based fees
on the back of reduced deal flow in
Investment Banking.
Of particular interest is the strong
growth in electronic banking fees,
generally considered to be a cheaper
alternative to other transaction
channels. The continued migration
of customers to electronic banking
channels could significantly impact
the net fee and commission income
earned in future periods.
significantly impacted earnings.
Competition for derivative flows in
emerging markets remains intense,
and has increased as international
banks seek to grow in emerging
markets, resulting in a compression
of margins. Equity markets have
however been buoyant as fears over
the GFC abated.
Fair value income
Insurance and
Bancassurance income
air value income decreased by 1.9%
on 1H10 and by 12.5% on 2H09.
Proprietary trading and customer
demand for Interest Rate and Foreign
Exchange risk management products
remained relatively low. Uncertainty
regarding the market direction,
especially following the sovereign
debt crisis in Europe in 1H10,
Insurance and Bancassurance
income increased by 64.7% in 2H10
against 1H10 and by 19.1% on 2H09,
albeit from a relatively low base.
This dramatic increase is primarily
attributable to strong premium
growth as a result of stronger crossselling and the launch of more
innovative products. Increased
investment returns following the
recovery of the global financial
markets have also significantly
contributed to this growth.
Non-interest income
Rm
60,000
50,000
40,000
30,000
20,000
10,000
0-10,000
1H09
2H09
Net f ee and commission income
1H10
2H10
Fair value income
Insurance & Bancassurance income
Other income
Source – PwC Analysis
South Africa – Major Banks Analysis 9
Efficiency
Combined results
Cost-to-income ratio
Compared to the prior period, banks’
operating expenses increased by
12.1 % while total operating income
increased by 6.1%. Consequently
the banks’ combined cost-to-income
ratio deteriorated from 57.1% in
1H10 to 59.9% in 2H10. The banks
have continued to place significant
emphasis on tightly managing their
expense base. Given the subdued
growth in total operating income,
these cost containment strategies
have paid dividends and limited the
impact on the cost-to-income ratio.
All of the banks have stated at their
results presentations that this will
remain a strategic priority in 2011.
Of particular interest is the continued
significant investment made in
information technology, from an
already high base in prior periods.
The banks have cited several reasons
for this:
• There has been ongoing upward
pressure on banking technology
costs in terms of security, business
continuity, and recoverability. The
complexity and threats in these
areas have risen exponentially in
recent years, alongside the cost of
staying ahead of the game.
• The importance of technology
to the banks’ operations has
been on a long-term upward
trend. While this has generated
efficiencies in many areas, it has
also consequentially increased
technology costs.
• Most importantly of all in the
10 South Africa – Major Banks Analysis
2H10
1H10
2H09
1H09
59.9%
57.1%
55.7%
56.1%
FY10 – Operating expenditure
Total staf f costs
Inf ormation Technology
41%
47%
Depreciation,
amortisation and
impairments
5%
Other
7%
-
Source – PwC Analysis
FY09 – Operating expenditure
Total staf f costs
40%
47%
6%
Inf ormation Technology
Depreciation,
amortisation and
impairments
7%
Other
Source
- – PwC Analysis
most recent year banks have made
investments to replace or enhance
core banking systems both
locally and abroad. Changes in
regulatory and risk requirements
have also necessitated, and will
continue to necessitate, various
system enhancements as banks
require access to more historic and
detailed data on a more regular
basis.
Staff costs, which represented 47%
of total expenses, continue to grow at
levels well above inflation, reflecting
an 11.8% increase in 2010 from
2009. As a result, staff costs are the
subject of more and more discussion
in boardrooms. Banks have begun to
respond to external pressures on staff
costs by increasing amounts paid in
shares and extending vesting periods.
Operating expenses were also
favourably impacted by the strong
Rand during the period. The average
USD/ZAR rate strengthened from
8.42 in 2009 to 7.32 in 2010. As
South African banks continue
to expand into Africa and other
emerging markets, currency
fluctuations are having a more
pronounced impact on earnings.
Banks will continue to place
considerable focus on reducing their
cost base over the next few years.
Because we expect that margins will
remain compressed, and beyond
2011 lending volumes may improve
only modestly, we expect that cost
management will rise further in
terms of relative importance and
may well be a distinguishing factor
between the relative performances of
the banks.
South Africa – Major Banks Analysis 11
Adapting to new realities in a post-crisis
environment
Confidence is back – this is the
overwhelming message from CEOs
in PwC’s 14th Annual Global CEO
survey released in the first quarter
of this year. More specifically, CEOs
are nearly as confident of growth
this coming year, as they have ever
been in the history of our survey.
Realising growth aspirations will not
be easy; however, as companies will
have to respond to new challenges
in the post-crisis environment. PwC
explored some of these new realities
and the mega trends that will affect
the Global and South African banking
industry in a study called Project
Blue.
Top-line growth main
concern for South
African banks
As mentioned earlier, South African
banks are struggling to grow top-line
revenue as consumers are reluctant
to borrow due to over-indebtedness,
inflation fears and anticipated
interest rate increases. As a result,
many believe South African banks
will have to tap into the rapidly
increasing emerging-to-emerging
market trade flows if they want to
realise their growth aspirations. It
is therefore not surprising to see the
banks focusing their attention on
expansion into Africa to capture these
trade flows.
This is supported by our economic
forecast, which suggests that the GDP
of E7 emerging economies could be
bigger than that of the G7 economies
by 2020, and that China may
overtake the US before the end of
the decade. Many Western banks are
looking to offset slow growth in their
home markets by strengthening their
presence in South America, Africa,
Asia and the Middle East. Most of the
12 South Africa – Major Banks Analysis
banking and capital markets CEOs
are clearly in this camp. 61% think
that emerging markets will be more
important to their organisation’s
future than developed markets.
However, success will be hard won
as emerging economies respond to
international interest. For example,
interest in the African continent
from international players has not
been lost on African CEOs: 28% have
changed their strategy because of
competitive threats, compared to a
global average of 10%.
Responding to
changing customer
requirements
More CEOs are responding to the
rise of middle-class consumers in
emerging economies by developing
products and services tailored to
those high-growth markets, while
also looking to serve the changing
needs of more mature markets.
Our CEO Survey reveals that CEOs
are placing a higher premium on
innovation today. Since 2007,
business leaders have consistently
reported that their single best
opportunity for growth lay in better
penetration of their existing markets.
Now they are just as likely to focus
on the innovation needed for new
products and services.
We believe that changing customer
behaviour and accessible banking
are two of the key drivers that will
fundamentally influence the business
models of South African banks.
South African banks
Many believe the previously
unbanked market represents a
significant opportunity for revenue
growth in South Africa. To date this
market has largely been serviced by
Tier 2 banks, with limited inroads
being made by the bigger banks.
However, these large banks have now
started to tailor their service offerings
to enable them to provide banking
services to the mass market. Inability
to do so will result in a loss of market
share and stagnating revenue growth
over the long term.
“In the same way, for the younger people
who went through this recession, it will
forever have an impact on the way they
behave, the way they incur debt, the way
they spend, the way they save. It will be a
permanent change”
– Richard K. Davis,
President and CEO of U.S. Bancorp
It is notable that 87% percent of
global banking and capital market
CEOs believe that innovations will
lead to operational efficiencies and
provide them with a competitive
advantage. 64% also believe that
their IT investments will help
them tap into new marketing and
transactional opportunities such as
mobile devices and social media.
With more than 40 million mobile
devices in operation in South Africa,
this is clearly a distribution channel
that will be explored further by South
African banks as they penetrate the
mass market.
Growth opportunities,
especially in emerging
markets, prompt
changes to talent
strategies
As they look to expand globally, CEOs
recognise that they require a more
diverse workforce, including more
women and different geographic
leaders as they look to expand
globally. Filling the skills gaps in
emerging markets begins with banks
making themselves more attractive
to potential and current employees;
as well as looking for better ways to
develop and deploy staff globally.
Becoming the employer of choice
is a vital advantage in dynamic
markets where top talent has the pick
of jobs from domestic and foreign
employers.
We have noted in Project Blue that
South African banks will have to
reconsider the remuneration policies
and development opportunities they
offer in order to attract and retain key
talent. The role that organisational
culture plays in talent retention
should also not be underestimated.
Overregulation
continues to rank
amongst the top 3
risks on CEOs’ minds
Nearly three quarters of CEOs told
us they would actively support new
government policies that promote
growth that is economically, socially
and environmentally sustainable.
However, overregulation remains
“We expect that governments will not
only be looking to the private sector
for the provision of capital, but for
increasing the delivery of a whole
range of social services. For example,
in the UK the government is looking at
different ways to provide services from
the private sector in terms of meeting the
government’s objectives.”
Nicholas Moore,
CEO of the Macquarie Group
a concern for global CEOs. For
South African banks, changes to
Basel III, particularly the proposed
new liquidity requirements, could
fundamentally change the business
models of the banks and may
negatively impact on banks’ ability to
grow. However, it is the positive step
that the National Treasury is leading
a task force investigating how best to
deal with the challenges of Basel III.
The majority of global
banking CEOs regard
political instability as
the most significant
global risk
Western banks will need to adjust
to governments exerting greater
control over their activities and the
real economy. In developed markets,
the crisis necessitated a rapid
increase in state intervention and, in
many people’s eyes, has legitimised
ongoing intervention. Project Blue
highlights the rise of state-directed
capitalism as one of the mega trends
that will have an impact on banking
globally. Western banks’ ability to
respond to opportunities in emerging
markets will largely depend on the
risk appetite of governments of
the jurisdictions from which they
operate. This creates opportunities
for emerging market banks to capture
market share if they are able to
respond to opportunities quickly.
Political interference in banking is
much less common in South Africa,
given that none of its banks had to be
bailed out. However, there has been
ongoing support by the South African
government for community banks
and the Postbank to ensure access to
banking services for the unbanked
market. Although the debate around
nationalisation currently focuses
on mines, banks have also been
mentioned in this context not too
long ago. All of these factors could
profoundly change the South African
banking environment in future.
It is clear that South African banks
will have to contend with a number
of new realities if they wish to
remain relevant in the post-crisis
environment. The most successful
banks are likely to be those which can
respond to the opportunities, while
at the same time making the most of
their principal competitive strengths.
This will accelerate the move towards
precision as banks become ever
more ruthless in the defence and
optimisation of their core franchises.
As one CEO put it, the bank that can
implement its strategy in the most
efficient way will be the winner.
South Africa – Major Banks Analysis 13
Asset quality
Rm
%
2,400,000
6.0
5.0
2,350,000
4.0
3.0
2,300,000
2.0
2,250,000
1.0
0
2,200,000
- 1.0
2,150,000
- 2.0
- 3.0
2,100,000
Q1
Q2
Q3
Q4
Q1
2008
Q2
Q3
Q4
Q1
Q2
2009
Loans and advances (LHS)
Q3
Q4
2010
Loans and advances – year-on-year growth (RHS)
Source – SARB (all banks)
Levels of gross
advances
Total non-performing
loans (NPLs)
Given the subdued global sentiment
and the strained economic
environment in 2010, it is not
surprising that there was limited
overall growth in advances for the
full year 2010.
An analysis of NPLs as a percentage
of gross advances at 2H10 follows:
The growth in total advances across
the Corporate and Retail sectors for
2010 was 2.2%.
Total advances as at 2H10 increased
to R2.2tn compared to R2.1tn as at
2H09. This increase was made up
of an increase in total advances of
approximately 5.1% in the Retail
sector (total retail advances as at
2H10 amounted to R1.4tn compared
to R1.3tn as at 2H09), a 0.3%
marginal decrease in the Corporate
Banking sector, and a decrease in the
‘Other’ advances category amounting
to R18bn during the year.
14 South Africa – Major Banks Analysis
Growth
in NPL
advances
(%)
NPLs/Advances
(%)
2010
2009
Personal and Business Banking/
Retail
-1.2%
7.5%
7.9%
Mortgage loans
-1.5%
9.4%
9.7%
5.8%
5.5%
5.3%
Card debtors
-6.9%
8.8%
9.5%
Other loans and advances
-4.2%
3.7%
4.6%
Corporate and Investment Banking
-1.4%
3.0%
3.0%
Corporate lending
-0.5%
3.0%
3.0%
1.7%
3.0%
3.1%
-130.7%
0.3%
2.5%
-1.3%
5.9%
6.1%
Instalment sale and finance leases
Commercial property finance
Central and Other
Total
The High Court stated in its judgement that “to allow a credit
provider to unilaterally terminate the consumer’s protection at
the precise moment when he or she may need it the most can only
be construed as absurd. It would be like providing the consumer
with an umbrella and then snatching it back the moment it starts
raining.”
Although the levels of inflows into
the early arrears categories seem to
have decreased, the level of NPLs in
the banks’ balance sheets remains
sticky with a marginal decrease in
NPL levels across the banks. Total
NPLs amounted to R130bn, around
5.9% of total gross advances (R2.2tn)
in 2H10 (compared to a ratio of 6.2%
in 2H09). The marginal decrease in
NPL levels was made up of growth
in ABSA’s NPL book by 9.8%, offset
by decreases in the NPL books of
the other banks (Nedbank’s and
FirstRand’s NPL books decreased
by 1% and 8.7% respectively, and
Standard Banks’ decreased by
11.7%).
The high NPL levels are as a result of
the large number of client accounts
that were previously in arrears, which
are now working their way through
the banks’ legal departments. The
combined level of NPLs now stands
at R76bn for the Mortgage Portfolio’s
alone. The number and value of
loans subject to legal remedy will no
doubt increase the workloads of the
collections, legal and recovery teams
within banks. Given the volumes of
loans designated as NPLs, banks will
need to reassess their expectations
of when these properties will be
recovered. This may have an impact
on the timing of these recoveries and
ultimately Loss Given Default (LGD)
assumptions used in estimating
mortgage book impairments.
The numbers of debt counselling
clients in the non-performing
categories seem to have reached
a peak in 2010. We saw inflows
into the debt counselling process
starting to show a more stable trend
in 2H10. During 2010, banks across
the industry placed an emphasis
on terminating clients that had not
stuck to their debt counselling terms.
The incentive for banks to terminate
clients and place them back into
the legal recovery process is that
recoveries are made sooner by this
means, which positively impacts
impairments.
The manner in which banks
terminate clients was recently called
into question, where a full bench in
the Western Cape High Court ruled
that a credit provider could not
terminate the debt review process
where an application for a debt rearrangement had been lodged by the
debt counsellor with the magistrate
court and was still pending. The High
Court judgement demonstrated that
if consumers and debt counsellors
fulfilled their duties by submitting
an application for debt review to the
magistrate’s court within 60 days
of receiving such application, the
credit provider could not unilaterally
terminate the debt review process.
The High Court stated in its
judgement that “to allow a credit
provider to unilaterally terminate the
consumer’s protection at the precise
moment when he or she may need
it the most can only be construed as
absurd. It would be like providing the
consumer with an umbrella and then
snatching it back the moment it starts
raining.” The High Court implied
that a typical debt review often takes
longer than 60 business days before it
results in an order by the magistrate’s
court.
Rm
%
50,000
40
45,000
35
40,000
30
35,000
30,000
25
25,000
20
20,000
15
15,000
10
10,000
5,000
5
0
0
1H09 2H09 1H10 2H10 1H09 2H09 1H10 2H10 1H09 2H09 1H10 2H10 1H09 2H09 1H10 2H10
ASA
FSR
NPLs (LHS)
NED
SBK
Specif ic impairment of NPLs (RHS)
Source – PwC Analysis
South Africa – Major Banks Analysis 15
“A year-on-year increase of 24.8% (from 206 to
257) in company liquidations was recorded for
January 2011 compared with January 2010”.
– Statistics SA
The press suggests that the National
Credit Regulator has a large backlog
of unresolved cases due to capacity
constraints in the court system.
This is not good news for banks as
an extension of this process means
higher LGD percentages as a result of
potentially lower recovery rates in the
future.
Retail vehicle and asset finance
categories for financial reporting
purposes, whilst other banks include
the Business and Corporate vehicle
asset finance business under their
Corporate operations. This means
that direct comparisons of key Retail
vehicle and asset portfolio ratios is
not always possible.
How banks resolve the current levels
of NPLs and those NPLs in the debt
review process needs to be monitored
in 2011.
Notwithstanding the above, it
appears that vehicle and asset
finance advance growth was
approximately 1.8% for the year
since 2H09, with most of the growth
coming from retail advances as car
sales increased in 2H10. NPLs as a
percentage of advances are close to
5.5% and have increased slightly
in 2H10 compared to 2H09, when
they were 5.3%. Coverage ratios
have generally increased as the
average age of the accounts with NPL
status has increased. The implied
LGD decreased to approximately
46.5% across all of the banks (from
approximately 48.8% during 2H09).
Analysis of gross
advances and nonperforming loans in
the mortgage loan
portfolio
Mortgage loan advance growth has
been 2.2% for the year since 2009.
NPL as a percentage of advances is
9.4% and has decreased slightly for
2H10 compared to 2H09, when it was
9.7%. Coverage ratios have increased
as the average age of accounts
with NPL status has increased. The
implied LGD (calculated by dividing
the specific impairment amounts by
the NPL book) remained relatively
consistent at 18.6% across all banks,
compared to approximately 18.5% as
at 2H09.
Analysis of gross
advances and nonperforming loans in
the vehicle and asset
finance portfolio
Certain South African banks include
their Corporate or Business vehicle
asset finance books within the
16 South Africa – Major Banks Analysis
Analysis of gross
advances and nonperforming loans in
the card portfolio
Card advances growth has been 0.1%
for the year since 2H09.
NPLs as a percentage of card
advances are 8.8% and have
decreased slightly for 2H10 compared
to 2H09, when they were 9.5%.
Coverage ratios have increased as
the average age of accounts with NPL
status has increased. The implied
LGD decreased to approximately
75.6% across all of the banks (from
approximately 77.7% as at 2H09).
The improvement in LGDs in this
portfolio implies that banks have had
some success in realising outstanding
balances. Our industry experience
shows that post-write-off recoveries
in the current year have been more
favourable across this portfolio
compared to previous years and
would most likely taper off in the
future.
Analysis of gross
advances and nonperforming loans in
the wholesale portfolio
Corporate advances decreased
slightly by 0.3% for the year since
2H09.
NPLs as a percentage of advances
were 3.0% for 2H10 and were at
similar levels for 2H09. The implied
LGD rate increased to approximately
40.3% across all of the banks (from
approximately 26.4% for 2H09).
A review of the latest liquidation
numbers shows that Corporate
clients may not be out of the woods
yet. More companies closed their
doors in January this year compared
to the same month in 2010, Statistics
SA said recently. “A year-on-year
increase of 24.8% (from 206 to
257) in company liquidations was
recorded for January 2011 compared
with January 2010”. Over the
same period, closed corporation
liquidations rose from 110 to 143,
and company liquidations increased
from 96 to 114.
Total income
statement impairment
charge ratio
(impairments to the
income statement
divided by average
advances)
The total income statement
impairment charge across the
major banks was R24.3bn for 2010
compared to R35.3bn for 2009.
There is therefore a noticeable
improvement in the impairment
credit charge ratio, which varied
from 0.9% to 1.4% for 2010. This
varied from 1.3% to 1.7% in 2009.
The levels of income statement
impairment seem to have reached its
highs in 2009 and are now starting
to decline, albeit at a much slower
rate than many had anticipated.
The low interest rate environment
coupled with relatively strong salary
increases left consumers with more
disposable income in 2010, which
resulted in fewer inflows into the
arrears categories. As noted earlier,
external inflationary pressure and
rises in interest rates will have a
negative impact which may possibly
result in new NPL volumes increasing
over time.
Total coverage ratios
The coverage ratios (calculated as
specific impairment divided by NPL
book) across all products decreased
slightly during the year. This trend
is not surprising given that the
average age of loans included in
the NPL category has not decreased
substantially.
The average NPL coverage ratios
across certain products were as
follows:
• Mortgage loans – 18.6%
(FirstRand was the highest at
19.64% and Standard Bank the
lowest at 17.43%).
• Instalment sales business – 46.5%
(Standard Bank was the highest at
57.91% and FirstRand the lowest
at 41.19%).
• Cards – 75.6% (Nedbank was the
highest at 96.53% and Standard
Bank the lowest at 67.16%).
%
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
1H09
2H09
1H10
ASA
2H10
1H09
2H09
1H10
FSR
Specif ic impairment %
2H10
1H09
2H09
1H10
NED
2H10
1H09
2H09
1H10
2H10
SBK
Portf olio impairment %
Source – PwC Analysis
South Africa – Major Banks Analysis 17
Capital and funding
Basel III – a significant
concern for banks
Deposits
Capital
Optimising the mix of the deposit
book remains a key focus in reducing
the high cost of wholesale and longer
term funding. This is critical as
banks compete more aggressively for
lower-cost deposit pools with longer
behavioural duration and as they
start to work towards the potential
Basel III liquidity ratios.
The individual Capital Adequacy
Ratios (‘CAR’) for the major banks
continued to improve in 2H10. The
average CAR increased from 15.2%
to 15.3% over the comparable period,
reinforcing the upward trend on
higher capital ratios. Slightly more
pronounced, however, is the rise in
Tier 1 capital where the combined
average ratio increased from 12.5%
to 12.8%.
Low interest rates, coupled with
low domestic savings levels and the
deleveraging of consumers, led to
modest growth in retail deposits
during 2010. As noted above, the
increased competition and duration
negatively impacted on net interest
margins earned during 2H10.
One of the main issues that has been
preoccupying many banks is the
impact of Basel III and other local
regulatory changes to the capital
structure of South African banks. The
banks’ conservative approach has set
them up well to face the challenges
of compliance with the new rules.
However, their dependence on
short-term wholesale funding and
the limited supply of South African
government securities will make
compliance with the liquidity rules
more challenging.
This latter challenge is well
recognised, to the extent that the
Basel Committee is now developing
a separate standard for jurisdictions
which do not have sufficient high
quality government securities
available.
Rm
2,500,000
%
50
45
40
35
30
25
20
15
10
5
0
2,000,000
1,500,000
1,000,000
500,000
2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Government
Wholesale
Corporate
Retail
Other
% Government
% Wholesale
% Corporate
% Retail
% Other
Source – SARB
18 South Africa – Major Banks Analysis
2008
2009
2010
Fundamental to the Basel III rules
are the requirements for the banks to
hold more capital of higher quality. In
particular:
• All banks must hold a minimum
common equity (common
shares and retained earnings
less deductions, some of which
were previously taken against
lower forms of capital) of 4.5%
of risk weighted assets, which
may be supplemented by Pillar 2
requirements (set by SARB based
on individual bank risk profiles)
• A ‘counter-cyclical buffer’ ranging
from 0 – 2.5% of common equity,
determined by SARB as required,
for instance in times of excessive
credit growth.
The result of all these measures is
that the new common equity (core
Tier 1) ratio will be at least 7%. In
addition, the banks will want to hold
their own internal buffer, over and
above this regulatory minimum, as
part of normal risk management;
particularly as the sanctions for going
under 7% will involve restrictions
on their ability to pay dividends.
We suspect that banks may view the
buffers as de facto minima due to the
negative market signals associated
with holding less capital than the
required buffers.
• A ‘conservation buffer’ of 2.5%,
above the 4.5% minimum, must
be created to absorb losses
during periods of financial and
economic stress. Drawing on this
buffer during times of stress will
result in constraints on earnings
distributions
As well as these requirements for
common equity, the banks are also
required to hold Tier 1 capital to a
minimum of 8.5% (i.e. including
the conservation buffer, of which
at least 7% is common equity) and
total capital (i.e. Tier 1 and Tier 2)
of at least 10.5%. In South Africa,
additional capital requirements
could push the total minimum capital
requirement to 12% due to the Pillar
2 (a) add-on of 1.5% for banks.
%
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
1H09 2H09 1H10 2H10 1H09 2H09 1H10 2H10 1H09 2H09 1H10 2H10 1H09 2H09 1H10 2H10 1H09 2H09 1H10 2H10
ASA
FSR
Total Tier 1 capital
NED
SBK
Combined results
Total Tier 2 capital
Source – PwC Analysis
South Africa – Major Banks Analysis 19
As Lord Turner (Chairman of the UK’s Financial Standards
Authority) is reported to have said, “If we were philosopher
kings designing a banking system entirely anew for a
greenfield economy, should we have set still higher capital
ratios than in the Basel III regime? Yes I believe we should.”
Banks adopting the internal rating
based (IRB) approach to credit risk
would be particularly concerned
about the proposed re-introduction
of the 6% scaling factor to credit risk
weighted assets. This is not strictly
a Basel III amendment but has been
proposed in draft amendments to
the South African regulations to the
Banks Act and will be implemented
along with the other Basel III
amendments. This proposed 6%
scaling factor could drastically
increase the capital requirement of
banks that apply IRB approaches to
credit risk. It is estimated that the
6% scaling factor could result in a
reduction of 45 to 60 basis points
in the capital adequacy ratio of the
banks adopting this approach.
In addition to being a reminder
of how much common equity the
banks have raised in recent years,
the table shows that the major
banks are in good shape in relation
to the requirements. Based on our
estimates, collectively the banks
would meet the 7% ratio for common
equity as at 31 December 2010 and
even the 11 % minimum Tier 1
ratio (including the counter-cyclical
buffer of 2.5%). The major banks
have an average of 12.75% Tier 1
ratio based on the current Basel II
regulations. This has prompted many
commentators to suggest that the
banks are currently over-capitalised.
The results presentations of the major
banks have all addressed this issue
in varying levels of detail. What is
clear is that given the uncertainty
as to how the Basel III rules will be
implemented in South Africa, the
major banks have been cautious in
returning capital to shareholders or
in setting their capital targets for the
years ahead. Our analysis of the issue
is that the apparent “surplus” of Tier
1 capital above the minimum does
20 South Africa – Major Banks Analysis
not take into consideration the fact
that the CAR under the current Basel
II rules is not the same as the Basel III
CAR, as the Basel III rules are stricter.
It also does not take into account the
additional capital requirements from
Pillars 2(a) or (b) or indeed what
these add-on ratios may be. Therefore
it would appear to be premature to
suggest that the banks should return
capital to their shareholders.
We also suspect that there will be
some upward pressure on equity
levels globally. For instance,
Switzerland has announced capital
requirements on its banks in the high
teens. We believe that the Basel III
requirements represent something
of a compromise on the part of
regulators in order to minimise any
adverse impact on economic growth.
Will the new liquidity
rules bite credit
growth?
The new liquidity rules are aimed to
ensure that banks’ funding is on a
more sustainable, long-term basis,
thus enabling better liquidity during
times of market turbulence. They
involve two ratios:
• The net stable funding
requirement (NSFR) will target
better duration matching of
assets and liabilities. This will be
introduced from 2018, following
an observation period starting in
2012.
• The liquidity coverage ratio
(LCR) will require banks to hold
sufficient high quality assets to
survive periods of severe market
stress. This will be introduced from
2015, following an observation
period starting in 2011.
Both these measures create
challenges for the South African
banks. The stable funding
requirement is a challenge because
it allows minimal funding of assets
through short-term liabilities,
whereas in the years leading up to
these new rules, the banks relied
fairly heavily on short-term funding.
Analysts’ research reports suggested
that as of July 2010 (and before
recently announced modifications),
the South African banks had a net
NSFR range of 40% to 60%, short of
the benchmark of 100%.
The liquidity coverage ratio is a
challenge in South Africa because
the assets most liquid during periods
of market stress are government
securities, and the strong financial
position of South Africa’s public
sector means there is a small pool of
government securities relative to the
size of bank balance sheets.
The challenge for the South African
banks in meeting these requirements
has been made somewhat less
daunting in the past few months by
Basel Committee announcements
which make the requirements less
onerous to meet.
For instance, for the LCR:
• A new category of ‘level 2’ liquid
assets (e.g. bonds of certain public
sector enterprises and covered
bonds of other banks) has been
introduced and may account for up
to 40% of the requirement.
issue for South African banks. For
example, pension funds are currently
limited in terms of Regulation 28 of
the Pension Funds Act in terms of
investing in bank debt instruments.
They are currently limited to
allocating 20% of their total assets
to banks debt instruments. In many
cases this 20% already includes the
liquid assets required by the pension
funds for operational purposes,
thereby further limiting the amount
of longer term investment in banks
liabilities. This has the effect of
reducing the availability of additional
longer term funding to banks,
exacerbating the problem for the
NSFR.
Despite these changes, the core
issue for the South African banks
regarding the LCR is the shortage of
South African Government Bonds.
The Basel Committee is currently
determining its response to this
challenge for jurisdictions such as
South Africa.
The project by the National Treasury
to investigate potential reforms to
various regulations such as those
relating to pension funds, collective
investment schemes and tax
regulations could potentially unlock
some of the liquidity that is not
currently available to banks.
The position regarding the
NSFR is much the same. Recent
announcements have eased the
impact of the proposals in relation
to jurisdictions such as South Africa,
for instance in how mortgages are
treated.
Another potential source of liquidity
for South African banks that has
not received much public debate is
covered bonds, i.e. banks issuing
bonds secured by ring-fenced
(inevitably very high quality) assets
on their balance sheet. Covered
bonds have received a lot of attention
and debate in countries such as New
Zealand and Australia. Covered
bonds could provide South African
banks with another option to access
long-duration wholesale funding,
and additionally the bonds could
potentially be treated as ‘eligible
securities’ for LCR purposes.
• The run-off rates of certain retail
and small and medium enterprise
deposits during periods of market
stress have been reduced.
• Likewise, assumed outflows of
certain funding from central banks
and government have also been
reduced.
Nonetheless the postponement
of their application until 2018
(following an observation phase)
is an indication of the extent of
transition required.
One of the major contributors to the
challenges in meeting the NSFR in
South Africa is that a large portion
of the savings pool is being held
within pension funds and other fund
managers. This, together with the
structural challenges to unlocking
such liquidity, has exacerbated this
GDP. On current specifications, this
risk cannot be ruled out, but we
believe in practice it is a low risk – the
National Treasury and the SARB are
acutely aware of this risk and, given
the long lead times, the transition can
be managed.
The worst-case scenario would
be where the NSFR requirements
can only be met through the banks
rationing credit (assets) to less than,
say, the rate of growth in nominal
South Africa – Major Banks Analysis 21
22 South Africa – Major Banks Analysis
ASA
14.3%
1.1%
36,770
12.80%
2.70%
15.50%
Return on equity
Return on average assets
Total number of staff*
Capital ratios
Tier 1
Tier 2
Total
* - Staff numbers for Firstrand were not repeated in December 2H10
45.5%
3.2%
4.0%
56.5%
8,118
8,041
23,340
19,474
42,814
-24,949
17,865
-6,005
-9
-3,262
8,589
7.4%
1.2%
35.1%
29.8%
39,641
-13,902
-2,087
-11,815
716,470
537,414
393,517
413,013
2010
Other operating income (% of total income)
Net interest margin (% of total assets)
Net interest margin (% of average interest earning advances)
Standardised efficiency ratio
Key data
Attributable earnings
Headline earnings
Net interest income
Non interest income
Total operating income
Total operating expenses
Core earnings
Impairment charge
Other income/(expenses)
Income tax expenses
Profit for the period
Profit & loss analysis (i)
Non-performing loans (% of advances)
Impairment charge (% of average advances)
Impairment coverage ratio
Implied loss given default
Non-performing loans
Impairments
Collective provisions
Individually assessed provisions
Asset quality & provisioning
Total assets
Gross Loans and acceptances
Total deposits
Risk weighted assets
Balance sheet
Rm
Key banking statistics – Annual
12.80%
2.70%
15.50%
36,150
15.1%
1.0%
48.1%
2.9%
3.7%
53.0%
6,840
7,621
21,854
20,232
42,086
-23,227
18,859
-8,967
-50
-2,340
7,502
6.5%
1.7%
36.5%
27.5%
36,089
-13,158
-3,222
-9,936
710,796
555,353
392,906
386,264
2009
FSR
13.60%
1.70%
15.30%
38,657
19.9%
1.3%
63.5%
2.1%
3.6%
59.1%
16,994
10,004
16,404
28,579
44,983
-26,955
18,028
-4,545
816
-3,926
10,373
4.6%
0.9%
46.6%
31.9%
21,117
-9,844
-3,117
-6,727
695,809
461,503
543,713
378,490
2010
13.50%
2.10%
15.60%
38,760
13.8%
0.8%
65.6%
1.5%
2.5%
59.3%
6,715
6,878
12,688
24,193
36,881
-22,113
14,768
-7,556
980
-2,439
5,753
5.5%
1.5%
47.5%
31.5%
23,121
-10,991
-3,703
-7,288
802,389
422,129
487,929
346,049
2009
NED
11.70%
3.30%
15.00%
27,525
11.1%
0.8%
44.3%
2.9%
3.4%
55.7%
4,811
4,900
16,608
13,215
29,823
-17,045
12,778
-6,188
-90
-1,364
5,136
5.5%
1.4%
41.9%
33.9%
26,765
-11,226
-2,154
-9,072
608,718
486,499
490,440
323,681
2010
11.50%
3.30%
14.80%
27,037
10.8%
0.8%
42.2%
2.9%
3.4%
53.5%
4,826
4,277
16,306
11,906
28,212
-15,538
12,674
-6,634
679
-1,307
5,412
5.9%
1.5%
36.2%
29.0%
27,045
-9,798
-1,968
-7,830
570,703
460,099
469,355
326,466
2009
12.90%
2.40%
15.30%
48,125
12.6%
1.0%
60.4%
2.6%
3.8%
63.1%
10,774
10,969
28,927
44,054
72,981
-47,519
25,462
-7,524
489
-4,965
13,462
5.8%
1.0%
40.1%
28.6%
42,701
-17,106
-4,884
-12,222
2009
11.80%
2.80%
14.60%
45,937
13.4%
1.0%
56.9%
3.2%
4.5%
57.3%
11,054
11,253
31,493
41,620
73,113
-43,589
29,524
-12,097
-9
-4,620
12,798
6.5%
1.3%
38.6%
27.0%
48,376
-18,666
-5,588
-13,078
1,297,788
742,173
768,548
599,822
SBK
1,341,420
730,131
796,635
620,064
2010
12.75%
2.53%
15.28%
151,077
14.5%
1.1%
53.4%
2.7%
3.7%
58.6%
40,697
33,914
85,279
105,322
190,601
-116,468
74,133
-24,262
1,206
-13,517
37,560
5.8%
1.1%
40.9%
31.0%
130,224
-52,078
-12,242
-39,836
3,362,417
2,215,547
2,224,305
1,735,248
12.40%
2.73%
15.13%
147,884
13.3%
0.9%
53.2%
2.6%
3.5%
55.8%
29,435
30,029
82,341
97,951
180,292
-104,467
75,825
-35,254
1,600
-10,706
31,465
6.1%
1.5%
39.7%
28.8%
134,631
-52,613
-14,481
-38,132
3,381,676
2,179,754
2,118,738
1,658,601
Combined
2010
2009
2.82%
-7.34%
2.16%
9.09%
17.92%
0.42%
3.16%
4.52%
4.99%
38.26%
12.94%
3.57%
7.53%
5.72%
11.49%
-2.23%
-31.18%
-24.63%
26.26%
19.37%
-4.39%
-25.78%
3.07%
7.94%
-3.27%
-1.02%
-15.46%
4.47%
-0.57%
1.64%
4.98%
4.62%
Growth
09/10
South Africa – Major Banks Analysis 23
ASA
14.8%
1.2%
36,770
12.80%
2.70%
15.50%
Return on equity
Return on average assets
Total number of staff*
Capital ratios
Tier 1
Tier 2
Total
* - Staff numbers for Firstrand were not repeated in December 2H10
44.8%
3.3%
4.2%
58.8%
4,276
4,179
12,047
9,761
21,808
-13,249
8,559
-2,301
-24
-1,756
4,478
7.4%
0.8%
35.1%
29.8%
39,641
-13,902
-2,087
-11,815
716,470
537,414
393,517
413,013
2H10
Other operating income (% of total income)
Net interest margin (% of total assets)
Net interest margin (% of average interest earning advances)
Standardised efficiency ratio
Key data
Attributable earnings
Headline earnings
Net interest income
Non interest income
Total operating income
Total operating expenses
Core earnings
Impairment charge
Other income/(expenses)
Income tax expenses
Profit for the period
Profit & loss analysis (i)
Non-performing loans (% of advances)
Impairment charge (% of average advances)
Impairment coverage ratio
Implied loss given default
Non-performing loans
Impairments
Collective provisions
Individually assessed provisions
Asset quality & provisioning
Total assets
Gross Loans and acceptances
Total deposits
Risk weighted assets
Balance sheet
Rm
Key banking statistics –
Semi 2010
13.10%
2.70%
15.80%
36,536
14.5%
1.1%
46.2%
3.2%
3.9%
54.0%
3,842
3,862
11,293
9,713
21,006
-11,700
9,306
-3,704
15
-1,506
4,111
7.1%
1.5%
36.8%
29.8%
38,903
-14,332
-2,743
-11,589
718,204
551,534
398,647
395,461
1H10
FSR
13.60%
1.70%
15.30%
38,657
20.0%
1.3%
63.2%
2.2%
3.7%
59.9%
12,070
5,043
8,379
14,396
22,775
-13,809
8,966
-2,084
506
-2,080
5,308
4.6%
0.9%
46.6%
31.9%
21,117
-9,844
-3,117
-6,727
695,809
461,503
543,713
378,490
2H10
13.50%
2.10%
15.60%
38,657
19.3%
1.2%
63.9%
1.9%
3.9%
58.2%
4,924
4,961
8,025
14,183
22,208
-13,146
9,062
-2,461
310
-1,846
5,065
5.0%
1.3%
48.3%
32.3%
22,205
-10,731
-3,566
-7,165
845,240
443,750
512,469
341,608
1H10
NED
11.70%
3.30%
15.00%
27,525
12.5%
0.9%
45.3%
1.5%
3.4%
56.0%
2,661
2,747
8,526
7,057
15,583
-8,943
6,640
-2,944
-84
-790
2,822
5.5%
1.3%
41.9%
33.9%
26,765
-11,226
-2,154
-9,072
608,718
486,499
490,440
323,681
2H10
11.50%
3.30%
14.80%
26,924
10.3%
0.7%
43.2%
1.4%
3.3%
55.3%
2,150
2,153
8,082
6,158
14,240
-8,102
6,138
-3,244
-6
-574
2,314
6.0%
1.5%
38.7%
31.8%
28,367
-10,989
-1,976
-9,013
590,847
472,292
480,418
331,577
1H10
12.90%
2.40%
15.30%
48,125
11.7%
0.9%
62.1%
2.6%
3.8%
65.1%
4,877
5,101
14,386
23,573
37,959
-25,549
12,410
-3,734
220
-2,529
6,367
5.8%
1.0%
40.1%
28.6%
42,701
-17,106
-4,884
-12,222
1H10
11.80%
2.80%
14.60%
52,768
13.3%
1.1%
58.5%
2.7%
3.7%
60.9%
5,897
5,868
14,541
20,481
35,022
-21,970
13,052
-3,790
269
-2,436
7,095
6.2%
1.0%
40.1%
28.7%
46,045
-18,464
-5,266
-13,198
1,320,522
737,546
773,128
620,971
SBK
1,341,420
730,131
796,635
620,064
2H10
12.75%
2.53%
15.28%
151,077
14.8%
1.1%
53.8%
2.4%
3.8%
60.0%
23,884
17,070
43,338
54,787
98,125
-61,550
36,575
-11,063
618
-7,155
18,975
5.8%
1.0%
40.9%
31.0%
130,224
-52,078
-12,242
-39,836
3,362,417
2,215,547
2,224,305
1,735,248
12.48%
2.73%
15.20%
154,885
14.3%
1.0%
53.0%
2.3%
3.7%
57.1%
16,813
16,844
41,941
50,535
92,476
-54,918
37,558
-13,199
588
-6,362
18,585
6.1%
1.3%
41.0%
30.6%
135,520
-54,516
-13,551
-40,965
3,474,813
2,205,122
2,164,662
1,689,617
Combined
2H10
1H10
2.20%
-7.34%
0.49%
-2.46%
2.88%
6.07%
1.67%
4.66%
2.11%
5.01%
42.06%
1.34%
3.33%
8.41%
6.11%
12.08%
-2.62%
-16.18%
5.10%
12.46%
2.10%
-4.13%
-24.19%
-0.19%
1.38%
-3.91%
-4.47%
-9.66%
-2.76%
-3.23%
0.47%
2.76%
2.70%
2H v 1H
5.59%
-13.68%
1.83%
2.16%
-0.35%
8.31%
0.82%
6.13%
5.21%
7.69%
46.59%
1.91%
2.19%
4.14%
3.27%
11.86%
-8.56%
-28.80%
251.14%
10.55%
4.46%
-4.39%
-29.92%
3.07%
7.94%
4.47%
-3.27%
-1.02%
-0.57%
1.64%
4.98%
4.62%
Growth
2H v 2H
8.95%
6.86%
8.57%
-0.35%
19.30%
28.19%
-0.61%
-6.31%
7.79%
1.91%
27.93%
26.85%
5.04%
11.46%
8.45%
11.07%
4.83%
-33.05%
-58.71%
50.26%
39.73%
6.75%
-25.32%
3.09%
3.98%
9.68%
11.07%
7.03%
12.48%
1.97%
1.17%
2.12%
1.56%
1H v 1H
24 South Africa – Major Banks Analysis
ASA
36,150
12.70%
2.90%
15.60%
Capital ratios
Tier 1
Tier 2
Total
15.0%
1.0%
Return on equity
Return on average assets
Total number of staff
47.5%
3.0%
3.8%
53.8%
3,568
3,795
11,082
10,023
21,105
-11,838
9,267
-4,133
-49
-1,202
3,883
6.5%
1.5%
36.5%
27.5%
36,089
-13,158
-3,222
-9,936
710,796
555,353
392,906
386,264
2H09
Other operating income (% of total income)
Net interest margin (% of total assets)
Net interest margin (% of average interest earning advances)
Standardised efficiency ratio
Key data
Attributable earnings
Headline earnings
Net interest income
Non interest income
Total operating income
Total operating expenses
Core earnings
Impairment charge
Other income/(expenses)
Income tax expenses
Profit for the period
Profit & loss analysis (i)
Non-performing loans (% of advances)
Impairment charge (% of average advances)
Impairment coverage ratio
Implied loss given default
Non-performing loans
Impairments
Collective provisions
Individually assessed provisions
Asset quality & provisioning
Total assets
Gross Loans and acceptances
Total deposits
Risk weighted assets
Key banking statistics
Rm
Balance sheet
–Semi 2009
11.50%
2.40%
13.90%
37,828
14.4%
1.0%
48.7%
2.9%
3.6%
52.2%
3,272
3,826
10,772
10,209
20,981
-11,389
9,592
-4,834
-1
-1,138
3,619
6.0%
1.9%
33.6%
28.4%
35,014
-11,778
-1,842
-9,936
748,627
581,785
412,202
392,355
1H09
FSR
12.20%
2.20%
14.40%
38,760
18.0%
1.1%
60.5%
2.0%
3.3%
57.5%
4,520
4,492
8,325
12,771
21,096
-12,165
8,931
-3,225
390
-1,681
4,415
5.5%
1.5%
47.5%
31.5%
23,121
-10,991
-3,703
-7,288
802,389
422,129
487,929
346,049
2H09
12.30%
2.20%
14.50%
38,863
10.5%
0.6%
72.4%
1.1%
3.3%
61.8%
2,195
2,386
4,363
11,422
15,785
-9,948
5,837
-4,331
590
-758
1,338
5.6%
1.8%
45.3%
30.9%
24,227
-10,984
-3,500
-7,484
809,851
429,815
478,083
329,504
1H09
NED
11.50%
3.40%
14.90%
27,037
11.5%
0.8%
44.6%
1.4%
3.4%
54.5%
2,262
2,289
8,121
6,529
14,650
-8,242
6,408
-3,199
-21
-596
2,592
5.9%
1.4%
36.2%
29.0%
27,045
-9,798
-1,968
-7,830
570,703
460,099
469,355
326,466
2H09
10.00%
3.20%
13.20%
27,831
10.6%
0.7%
39.6%
1.5%
3.4%
52.5%
2,564
1,988
8,185
5,377
13,562
-7,296
6,266
-3,435
700
-711
2,820
5.8%
1.6%
35.9%
28.0%
25,437
-9,142
-2,030
-7,112
557,318
441,095
460,358
349,874
1H09
11.90%
3.20%
15.10%
45,937
14.7%
1.1%
61.0%
2.7%
3.9%
57.0%
5,943
6,174
14,883
23,288
38,171
-22,778
15,393
-4,982
-144
-2,993
7,274
6.5%
1.3%
38.6%
27.0%
48,376
-18,666
-5,588
-13,078
1H09
12.00%
2.40%
14.40%
50,912
12.6%
0.9%
52.5%
4.4%
3.4%
57.6%
5,111
5,079
16,610
18,332
34,942
-20,811
14,131
-7,115
135
-1,627
5,524
5.3%
1.8%
44.2%
30.6%
38,884
-17,177
-5,289
-11,888
1,291,721
726,970
769,052
591,906
SBK
1,297,788
742,173
768,548
599,822
2H09
12.08%
2.93%
15.00%
147,884
14.8%
1.0%
53.4%
2.3%
3.6%
55.7%
16,293
16,750
42,411
52,611
95,022
-55,023
39,999
-15,539
176
-6,472
18,164
6.1%
1.4%
39.7%
28.8%
134,631
-52,613
-14,481
-38,132
3,381,676
2,179,754
2,118,738
1,658,601
11.45%
2.55%
14.00%
155,434
12.0%
0.8%
53.3%
2.4%
3.4%
56.0%
13,142
13,279
39,930
45,340
85,270
-49,444
35,826
-19,715
1,424
-4,234
13,301
5.7%
1.8%
39.8%
29.5%
123,562
-49,081
-12,661.0
-36,420.0
3,407,517
2,179,665
2,119,695
1,663,639
Combined
2H09
1H09
Explanatory notes
• All data has been obtained from
publically available financial
information, analyst presentations
and SENS announcements.
• Where the banks have restated
their financial information, the
latest restated information was
used.
• Normalised financial information
has been used for the detailed
income statements and balance
sheet disclosures, as some banks
prefer to disclose supplementary
information on this basis.
• Return on assets – Headline
earnings as a percentage of
average assets over the period.
• Net interest margin on assets – Net
interest margin as a percentage of
average assets over the period.
• Net interest margin on interestearning assets – Net interest
margin as a percentage of average
interest-earning assets over the
period.
• For comparability purposes,
results have been presented for
each six-month period.
• In those instances where annual
ratios or movements are disclosed,
we have recalculated these ratios
based on the semi-annual results.
Basis for calculations
• Implied loss given default –
Specific impairments as a
percentage of non-performing
loans.
• Cost-to-income – Operating
expenses (excluding indirect
taxes) as a percentage of total
operating income (excluding
impairments).
• Return on equity – Headline
earnings as a percentage of
shareholders equity
South Africa – Major Banks Analysis 25
Industry statistics
GDP growth
%
8.0
6.0
4.0
2.0
0
-2.0
-4.0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2006
2007
2008
2009
2010
Source – Statistics South Africa
Credit impairments as a
percentage of total assets
%
3.0
2.5
2.0
1.5
1.0
0.5
0
'92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Source – SARB
Overdraft credit by banks
(2004 = 100)
120
115
110
105
100
95
90
85
2H07
Source – SARB
26 South Africa – Major Banks Analysis
1H08
2H08
1H09
2H09
1H10
2H10
1H11
Change in mortgage advances
outstanding
%
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2006
2007
2008
2009
2010
Source – SARB
Absa House Price Index
980
960
940
920
900
880
860
Q2
Q3
Q4
Q1
2007
Q2
Q3
Q4
2008
Q1
Q2
Q3
Q4
2009
Q1
Q2
Q3
Q4
2010
Source – Absa
New Vehicles Sold
(2000=100)
220
200
180
160
140
120
100
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2006
2007
2008
2009
2010
Source – Statistics South Africa
South Africa – Major Banks Analysis 27
Total credit extension by all financial
institutions
Rtn
2.2
2.1
2
1.9
1.8
1.7
1.6
1.5
Q3
Q4
Q1
2007
Q2
Q3
Q4
Q1
2008
Q2
Q3
Q4
Q1
2009
Q2
Q3
Q4
2010
Source – SARB
Long-term bond yields
%
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0
1996
1998
2000
USA 6.2
2002
2004
2006
2008
2010
RSA 14.5
Source – SARB
Money market and capital interest
rates
%
23.0
21.0
19.0
17.0
15.0
13.0
11.0
9.0
7.0
5.0
1992
1994
1996
1998
bond yield
Source – SARB
28 South Africa – Major Banks Analysis
2000
prime
2002
2004
2006
2008
2010
Contact details
Tom Winterboer
Financial Services Leader - Africa
+27 11 797 5407
[email protected]
Johannes Grosskopf
Banking & Capital Markets Leader
+27 11 797 4346
[email protected]
Stefan Beyers
Banking & Capital Markets - Partner
+27 11 797 4690
[email protected]
Other contributors
Keith Ackerman
Banking & Capital Markets - Partner
+27 11 797 5205
[email protected]
Costa Natsas
Banking & Capital Markets - Partner
+27 11 797 4105
[email protected]
Irwin Lim ah Tock
Banking & Capital Markets Regulatory Practice – Associate Director
+27 11 797 5454
[email protected]
Louwrens van Velden
Banking & Capital Markets – Senior Manager
+27 11 797 4189
[email protected]
South Africa – Major Banks Analysis 29
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