South Africa â€“ major banks analysis

Maintaining stability amid uncertaintySouth Africa – major banks analysis

www.pwc.co.za/banking-analysis

PwC analysis of major banks’ results – 31 December 2011 reporting period

14 March 2012

The information contained in this publication is provided for general information purposes only, and does not constitute the provision of legal or professional advice in any way. Before making any decision or taking any action, a professional adviser should be consulted. No responsibility for loss to any person acting or refraining from action as a result of any material in this publication can be accepted by the author, copyright owner or publisher.

PwC

Contents

South Africa – Major Banks Analysis

ContentsCombined results overview 1

Economic outlook 6

Net interest income 10

Non-interest income 13

Efficiency 16

Asset quality 19

Capital and funding 27

Banking banana skins 2012 34

Global banking reaches digital tipping point 38

Key banking statistics 42

Contact 53

1PwC

Combined results overview1

2 South Africa – Major Banks Analysis

Combined headline earnings up 17.7%

Averagereturnonequity16.0%

Bad debt expenses down 14.8%

Total income up 5.1%

Operatingexpensesup2.6%

The last year must surely rank as one of the most newsworthy of all time. Earthquakes struck both New Zealand and Japan, and adverse weather conditions wreaked havoc in many countries. The Arab Spring spread through North Africa and the Middle East. The US sovereign credit rating was downgraded and Europe now finds itself in a perilous situation as the PIGS (Portugal, Italy, Greece & Spain) implement austerity measures to significantly reduce debt levels, which are believed to be unsustainable. Perhaps the only event more surprising than these is that New Zealand managed to win a Rugby World Cup for the first time since 1987.

Amid this volatility, emerging economies continue to prosper off the back of increased demand and capital inflows seeking higher returns, as historically low interest rates continue in most developed economies.

The South African economy has been relatively stable over the past calendar year and managed to continue to grow at 3.1%, supported by relatively low and stable interest rates, higher commodity prices and, for most of the year, a weaker rand, which boosted export revenues.

Our economy is, however, far from immune from woes in the northern hemisphere. Business and consumers alike continue to curb spending and deleverage. Business confidence remained at low levels for most of 2011, with corporate credit gaining some traction towards the end of the year and public-sector fixed investment activity beginning to improve.

The last six months have reinforced our continuing central theme – that South African banks remain well positioned. While the major banks (Absa, FirstRand, Nedbank and Standard Bank) may have had a rocky start to the global financial crisis when South Africa dipped into recession, they have since strengthened their positions through a combination of increasing capital levels, changing funding strategies and higher funding costs, reducing risk appetite, holding significantly more liquid assets and aggressively driving productivity improvements. The impact of new regulation on product and pricing decisions remains a cause of unease and the banks have all noted their uncertainty with regard to pricing on longer-term transactions.

3PwC

Combined results of six and 12-month periods

Combined results

(R millions)2011 2010

2011 v 2010

2H11 1H112H11 v

1H11

Net interest income 94 125 86 671 8.6% 48 669 45 456 7.1%

Non-interest income 104 982 102 789 2.1% 52 798 52 184 1.2%

Total operating income 199 107 189 460 5.1% 101 467 97 640 3.9%

Total operating expenses 118 008 -115 007 2.6% -61 021 -56 987 7.1%

Core earnings 81 099 74 453 8.9% 40 446 40 653 -0.5%

Impairment charge -20 824 -24 455 -14.8% -10 145 -10 679 -5.0%

Other income/(expenses) 1 012 914 10.7% 523 489 7.0%

Discontinued operations 591 - -

Income tax expenses -16 520 -13 405 23.2% -8 165 -8 355 -2.3%

Profit for the period 44 767 37 507 19.4% 22 659 22 108 2.5%

Attributable earnings 44 361 40 697 9.0% 22 366 21 995 1.7%

Headline earnings from continuing operations 39 918 33 914 17.7% 21 176 18 742 13.0%

Return on equity 16.0% 14.5% 10.3% 16.3% 15.6% 4.7%

Source: PwC analysis

Given these circumstances, the major banks reported aggregate ROE of 16.0% for FY11, up 10.3% year over year (YOY) on FY10 and up 13.2% half over half (HOH) on 2H10. Headline earnings grew to R39.9bn, an increase of 17.7% YOY. These ROE levels remain lower than pre financial crisis levels for these banks, but are commendable given that they are holding additional capital buffers as they await final implementation guidance for Basel III in South Africa.

Unpacking earnings growth provides some interesting context. The main driver of growth has been the containment of costs, up only 2.6% YOY and 1.6% HOH; and particularly the reduction in impairment charges of 14.8% YOY (9.9% HOH). These factors outweighed muted revenue growth of 5.1% YOY as each of the banks battles for lasting top-line growth.

It is possible that the reduction in non-performing loans (down 15.2% YOY) means that impairment levels have now bottomed out and that the boost to earnings provided by the decline in impairment charges has come to an end. This could increase pressure on earnings growth targets for 2012 and beyond.

Net interest income (NII) continues to be impacted by the low interest rate environment, but loan growth, asset mix changes and repricing have contributed to YOY growth of 8.6% (8.8% HOH). This continues to be weighed down by the negative endowment impact, the fight for cheap retail deposits and the cost of lengthening the funding profile.

Despite uncertainty about the direction of interest rates and the excess liquidity carried by the banks, we see NII continuing to play the dominant role in revenue generation, but it will be interesting to see how creative the banks become as they seek to defend margin levels.

Looking at credit growth, gross loans and advances increased at better rates during 2011, up 8.7% YOY. This has been driven by an increase in corporate demand for term funding and major banks beginning to effectively compete in the unsecured market. Home loan demand remains muted, but secured lending in the form of motor vehicle loans is moving in a positive direction.


Deposit growth has benefited from the thrifty behaviour of both businesses and the consumer. Deposits were up 11.2% YOY and 6.8% HOH. This has helped maintain margin levels as these kind of deposits continue to provide the cheapest form of funding for credit growth and negate the impact of increases in wholesale funding costs. This fact in particular will be pleasing to the banks as they continue to debate the structural funding challenges of the South African market, with a view to implementing the net stable funding ratio (NSFR) proposed in Basel III.

Non-interest revenue (NIR) remains dominated by fee and commission income, which represents 64% of the total for 2H11. This remains a highly competitive area in which corporate business, and to a lesser extent government contracts, can make a huge impact on a particular bank’s income earning potential. With regard to retail customers, our market remains focused on widening the net and banking the unbanked. In doing so, the banks are finding innovative ways to reach their clients. This is evidenced by the fact that all the major banks reported customer gains, increases in access points such as ATMs, non-traditional branches and a continued focus on electronic and mobile channels.

This kind of competition can only be good for consumers and there are a number of innovations with regards to customer rewards and, more importantly, making customers feel engaged and giving them a voice. Social media has definitely begun to play a significant role and the recent ‘Twitter spat’ between two of the banks proves how seriously they take it. There has also been an increase in the creativity and amount of advertising used to attract customers.

Trading income dropped slightly in 2011 as a result of difficult trading conditions. Banks continue to focus on client flows and minimising the risk associated with proprietary trading. While volatility persists, customer flows should remain robust, but the positioning of books can be a significant challenge when there is lack of market direction.

Returning to the cost base and the soft revenue outlook, containing or reducing costs will remain a priority. At the same time this will be impacted by regulatory reform and core banking IT enhancements, which need to continue. The focus therefore will be on operational effectiveness, simplifying processes and the rationalising of businesses to achieve more focused strategic objectives.

Now, more than ever, banks will need to achieve a fine balance between investing in future growth and productivity on one hand, and achieving short-to medium-term earnings targets on the other.

What remains interesting to observe is the differing strategies the major banks have adopted with regard to Africa expansion. While this is an integral part of each banks strategy, South Africa remains the key earnings driver for the time being.

5PwC

Combined results of six-month periods

Combined results Comparative movement

(R millions) 2H11 1H11 2H10 1H10 2H 1H

Net interest income 48 669 45 456 44 730 41 941 8.8% 8.4%

Non-interest income 52 798 52 184 52 254 50 535 1.0% 3.3%

Total operating income 101 467 97 640 96 984 92 476 4.6% 5.6%

Total operating expenses -61 021 -56 987 -60 089 -54 918 1.6% 3.8%

Core earnings 40 446 40 653 36 895 37 558 9.6% 8.2%

Impairment charge -10 145 -10 679 -11 256 -13 199 -9.9% -19.1%

Other income/(expenses) 523 489 326 588 60.4% -16.8%

Discontinued operations - - 591

Income tax expenses -8 165 -8 355 -7 043 -6 362 15.9% 31.3%

Profit for the period 22 659 22 108 18 922 19 176 19.7% 15.3%

Attributable earnings 22 366 21 995 23 884 16 813 -6.4% 30.8%

Headline earnings from continuing operations 21 176 18 742 17 070 16 844 24.1% 11.3%

Return on equity 16.3% 15.6% 14.8% 14.3% 10.4% 8.5%



Net interest income Impairment charge

Non-interest income

Total operating expenses

Other income/(expenses)

Figure 1.1:Income statement figures of the major banks

Return on equity

R m

illio

ns

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

-100 000

-80 000

-60 000

-40 000

-20 000

-

20 000

40 000

60 000

80 000

100 000

120 000

1H09 2H09 1H10 2H10 1H11 2H11

ROE

Income tax expenses

0


Economic outlook By Dr Roelof Botha, economic advisor to PwC2

7PwC

Growth prospects enhanced by higher employment levels

Solid economic growth in the last quarter of 2011 secured a higher GDP growth rate for the year as a whole when compared to 2010, placing South Africa firmly on a new sustained upward phase of the business cycle.

Real GDP growth of 3.1% was recorded for 2011, marginally higher than the 2.9% growth rate of the previous year. Ten successive quarters of real output growth have now been recorded since the end of the recession in the third quarter of 2009, with all three of the composite business cycle indicators having recovered from the effects of the 2008/9 recession.

At the end of last year, the leading business cycle indicator was 26% higher than the low recorded in March 2009, while the coincident indicator was more than 15% higher than the low of August 2009. Until recently, concern remained over the lethargy of the lagging indicator to reverse a lengthy downward trend, but it has now clawed back by almost 6% from its January 2011 low.

Arguably the most encouraging news about the state of the country’s macro-economy is the reversal of fortunes in formal sector employment trends, as illustrated in Figure 2.1. According to the Quarterly Labour Force Survey conducted by Statistics South Africa, the economy created 573 000 formal sector jobs between the third quarter of 2010 and the end of last year.

Figure 2.1: Formal sector employment

8 700

8 800

8 900

9 000

9 100

9 200

9 300

9 400

9 500

9 600

9 700

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2009 2010 20112008

Tho

usan

ds



The welcome return to meaningful job creation to a large extent explains the significant degree of fiscal latitude National Treasury could exercise in the tabling of the 2012/13 budget. The Minister of Finance was afforded the luxury of simultaneously lowering the budget deficit/GDP ratio, providing marginal taxation relief to individuals in the low and middle income groups and presenting an expenditure framework conducive to higher economic growth, particularly through infrastructure projects.

Buoyant financial results from the majority of companies listed on the Johannesburg Stock Exchange, combined with employment growth, strong retail sales trends and rising salaries have provided the South African Revenue Service with the means to place the country’s public finances on a firm footing. The most recent estimates of fiscal revenue growth in the fiscal year ended 31 March 2012 confirm a healthy growth trend for the key sources of taxation, compared to the actual figures for 2010/11, as illustrated in the table below.

A close correlation traditionally exists between growth in the broadly-defined money supply (M3) and private-sector credit extension, as illustrated in Figure 2.2. The recovery of credit extension gained momentum during the second half of 2011 and is expected to increase further as inventory levels in the manufacturing sector play catch-up with healthy increases in new sales orders.

Figure 2.2: Annualised change in M3 money supply and private sector credit extension

-2

0

2

4

6

8

10

12

M3 14.79 Credit extension 13.6

Per

cent

Q1 Q2 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1

2010 2011 2012

Q3 Q4

2009

Revised estimates of tax revenues for fiscal year 2011/12 and % change over 2010/11 (actual figures)

Tax source R billion % change

Persons and individuals 249.7 10.0

Value-added tax 190.8 3.9

Companies 181.6 15.0

General fuel levy 37.2 8.0

Customs duties 32.3 21.1

Specific excise duties 25.9 12.7

Property taxes 7.9 -13.5

Electricity levy 6.4 28.7

Other 6.9 -1.9

Total 738.7 9.6

Note: Ranked by tax revenue

Source: National Treasury

Against this background, it is not surprising that most economists predict the country’s current real GDP growth trajectory of close to 3% will continue in 2012, with a strong likelihood of an acceleration in growth from 2013 onwards. As a result, confidence is starting to return and those that had forecast a dreaded ‘double-dip’ return to recession have fortunately been proven wrong.

9PwC

A close correlation traditionally exists between growth in the broadly-defined money supply (M3) and private-sector credit extension, as illustrated in Figure 2.2. The recovery of credit extension gained momentum during the second half of 2011 and is expected to increase further as inventory levels in the manufacturing sector play catch-up with healthy increases in new sales orders.

Figure 2.2: Annualised change in M3 money supply and private sector credit extension

-2

0

2

4

6

8

10

12

M3 14.79 Credit extension 13.6

Per

cent

Q1 Q2 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1

2010 2011 2012

Q3 Q4

2009



Net interest income3

11PwC

Net interest margin

Combined results

(R millions) 2H11 1H11 2H10 1H10

Gross loans and acceptances 2 407 860 2 243 809 2 214 408 2 206 626

Net interest margin (% of average interest earning assets) 4.1% 4.1% 3.8% 3.7%


The major banks’ combined net interest margin (NIM) continued to notch up by three basis points for the year, demonstrating focus and resilience despite low interest rates and a challenging business environment.

The primary revenue source for the major banks remains NIM, which makes up 49.5% of combined income. Our banks have managed to continue to grow their net interest margin, despite the stable, low interest rate environment. During 2H11, NIM increased to R48.7bn from R45.4bn earned in 1H11, contributing a total of R94.1bn for FY11, representing an increase of 8.6% YOY.

100 000

200 000

300 000

400 000

500 000

600 000

700 000

800 000

900 000

0

1

2

3

4

5

6

Figure 3.1: Net interest margin and advances

1H09

ASA FSR NED SBK

Gross loans and advances Net interest margin (% of average interest earning assets)

R m

illio

ns

2H09

1H10

2H10

1H11

2H11

1H09

2H09

1H10

2H10

1H11

2H11

1H09

2H09

1H10

2H10

1H11

2H11

1H09

2H09

1H10

2H10

1H11

2H11

This growth continues along the same trend we have reported on previously, and has largely been driven by changes in balance sheet composition. With regard to assets, the focus has been on higher margin products and improved pricing for lending as banks re-price longer-term deals. Deposit rates have also improved as banks seek to place less reliance on wholesale funding, although this is being offset by measures to lengthen their funding profiles.



Primary drivers of the improved margin include:

• Pricing improvements were noted by all the major banks, particularly in new business written, reflecting current credit conditions and liquidity pricing considerations. It is noteworthy that asset mix improvements tend to come from higher-yielding assets such as vehicle finance and unsecured lending, which tend to be higher risk.

• Impairment levels continued to decrease due to vigilant credit approval processes and sustained low interest rates, which continued to impact on consumers’ ability to repay debts, together with more effective debt collection management noted by all the major banks. This improved credit quality further enhances interest margins through the gradual unwinding of interest in suspense.

• Cash flow hedging continues to play a major role in the management of interest margins for some of the major banks. These banks continue to hold significant cash flow reserves, which serve to stabilise their interest rate risk management.

• Higher capital levels have a positive impact on NIM as this type of funding is generally long term and cheaper than debt funding. However, this has the opposite effect on ROE.

Margin pressures do remain, particularly in the current uncertain regulatory and interest rate environments. This manifests itself in:

• Aggressive pricing of deposits to lessen reliance on wholesale funding and better match and lengthen the funding profile of the bank. This is a trend we previously said we expect to continue, especially in light of the steps that need to be taken to meet the NSFR requirements of Basel III.

• The negative impact of low interest rates have a significant impact on NIM as net interest received on assets does not fully compensate for the increased costs associated with deposits and longer-term funding. Hedging of this endowment effect does alleviate these pressures, but it is usually not practical to effectively hedge the entire impact.

Looking ahead, funding costs could rise again as banks refinance in 2012 at rates that are expected to be well above 2011 rates. We expect the major banks to attempt to fund new lending through deposits, but they will still have to refinance maturing debt and build liquidity and stable funding ahead of the new Basel III requirements.

The South Africa interest rate environment continues to play a major role and it will be interesting to see where rates go over the course of 2012. We understand that the recent rating agency downgrades of the major banks have not had a significant impact on funding costs.

Figure 3.2: Combined net interest margin

3.0

3.2

3.4

3.6

3.8

4.0

4.2

Combined results

Per

cent

1H09 2H09 1H10 2H10 1H11 2H11


13PwC

Non-interest income4


Non-interest income

Combined results

(R millions) 2H11 1H11 2H10 1H10

Net fee and commission income 33 670 31 650 31 048 28 578

Fair value income 7 964 8 529 8 018 9 255

Insurance & bancassurance income 8 576 9 262 10 052 6 743

Other income 2 588 2 743 3 136 5 959

-10 000

0

10 000

20 000

30 000

40 000

50 000

60 000

Net fee and commission income Fair value income

Insurance and bancassurance income Other income

Figure 4.1:Non-interest income

1H09 2H09 1H10 2H10 1H11

R m

illio

ns

1H11



15PwC

Net fee and commission income

Net fee and commission income increased by 6.4% on 1H11 and by 8.4% on 2H10. This represents a remarkable achievement given the benign inflationary environment and considerable base established in prior periods.

This growth is largely attributable to strong transaction volume growth, especially in the vehicle and asset finance portfolios, coupled with inflationary increases on fees.

Of particular interest is the continued strong growth in electronic banking fees on the back of changing client behaviour and the launch of innovative electronic banking products. We expect this growth to continue as the major banks grow their footprint across Africa, which is generally considered to have a greater appetite for electronic banking offerings. The continued migration of clients to cheaper electronic channels will, however, continue to weigh down growth in absolute fee and commission income.

Fair value income

Fair value income continued on the negative trend established in the previous two consecutive reporting periods and was down 6.6% on 1H11 and 0.7% on 2H10.

European sovereign debt concerns and a volatile equities and commodities market negatively impacted trading conditions. Customer flow business has remained robust given the volatility experienced. The increase in demand for foreign exchange risk management products remains as clients hedge against the adverse effects of a volatile rand. However, continuing to position the trading book in an environment in which market direction is lacking remains a significant challenge.

Insurance and bancassurance income

Insurance and bancassurance income was down by 7.4% on 1H11 and by 14.7% on 2H10. This decrease is a reflection of decreased investment returns as a result of the relatively low interest rate environment in South Africa, coupled with volatile equity markets. This is offset by continuing strong premium growth as a result of improved cross-selling and the launch of more innovative products.


Efficiency5

17PwC

Cost-to-income ratio

Combined average

2H11 1H11 2H10 1H10

Cost-to-income ratio 57.9% 55.9% 58.9% 56.7%

0

10000

20000

30000

40000

50000

60000

70000

Total staff costs Information technology

Depreciation, amortisation and impairments

Cost/income (efficiency) ratio

Other

Figure 5.1:Operating expenditure

40

60

80

100

Non interest revenue (NIR)/cost ratio

1H09 2H09 1H10 2H10 1H11

R m

illio

ns

2H11

Per

cent


Compared to the prior period, banks’ operating expenses increased by 7.1%, while total operating income increased by 3.9%. Consequently their combined cost-to-income ratio deteriorated from 55.9% in 1H11 to 57.9% in 2H11. This reverses the favourable trend seen in 1H11 when the cost-to-income ratio arrested a trend of deteriorating ratios witnessed over two consecutive periods in 1H10 and 2H10.

Given the soft revenue outlook, containing or reducing costs will remain a chief priority. At the same time, mandatory regulatory reform projects and core banking IT enhancements will continue. The focus will be on simplifying and streamlining processes, including further geographical hubbing and infrastructure sharing.



We expect further reductions in discretionary spending, but this will need to be carefully balanced against the imperative to invest in future growth and productivity. Cost management may therefore be a distinguishing factor between individual bank’s relative performances in future reporting periods.

Banks have already made significant inroads into reducing discretionary expenditure. This is particularly evident in the changing mix of expenditure, with the relative contribution of staff costs to the total expense bill increasing and other expenses decreasing in terms of relative contribution.

Salaries, which continue to represent roughly half of the total expense bill, grew at a rate of 5.2% in FY11, when compared to FY10, which is in line with inflation. This increase is also reflective of the increased short- and long-term incentive awards associated with the improved operating performance of the banks. We note that the total number of employees as at 2H11 decreased by 0.3% from 2H10, reflecting the tight headcount management strategies currently being employed by banks.

Operating expenses were also unfavourably impacted by the weak rand during the period. The average USD/ZAR rate weakened from 6.90 in 1H11 to 7.62 in 2H11. As banks continue to expand across Africa and other emerging markets, currency fluctuations are expected to have a more pronounced effect on earnings.

19PwC

Asset quality6


Asset quality

Combined

(R millions) 2011 2010 2009

Gross loans and acceptances 2 407 860 2 214 408 2 179 754

Non-performing loans 110 378 130 224 134 631

Impairments -48 808 -52 078 -52 613

Collective provisions -14 191 -12 242 -14 481

Individually assessed provisions -34 617 -39 836 -38 132


Growth in gross loans and advances

2H11 v 1H11 2H11 v 2H10

Retail 3.2% 5.1%

Mortgage loans 0.3% 1.0%

Instalment sale and finance leases 4.7% 7.8%

Card debtors -1.2% 2.0%

Overdraft and other demand loans 5.8% 18.3%

Term loans and other revolving credit accounts 12.3% 10.8%

Other loans and advances 12.9% 14.0%

Corporate and investment banking 9.1% 10.5%

Central and other -35.2% -37.1%

Total 5.6% 7.3%


Figure 6.1:Loan portfolio growth

-4

-2

0

2

4

6

8

10

12

829

846

269

355

0 2 4 6 10 12 14

Mortgage loans Card debtors

Instalment sale and finance leases

Other loans and advances

Corporate and investment banking

% g

row

th in

ad

vanc

es f

rom

2H

10 t

o 1

H11

%NPL of advances

14

Gross loans and advances: = R100mn

62

8

Gross loans and advances

Credit demand increased slightly during 2H11. This can be seen in the 5.6% growth in gross loans and advances to customers from 1H11 to 2H11 and compares favourably to the growth rate of 1.6% when comparing 1H11 to 2H10.

Credit demand increased slightly during 2H11 as seen in the 5.6% growth in gross loans and advances to customers from 1H11 to 2H11. This compares favourably to the growth rate of 1.6% when comparing 1H11 to 2H10.

Total advances in 2H11 increased to R2.4tn compared to R2.2tn in 1H11. This increase comprised growth in total advances of approximately 3.2% in the retail sector (total advances in 2H11 was similar to 1H11 at R1.5bn), a 9.1% increase in the corporate banking sector (total advances in 2H11 was R0.8tn compared to R0.78tn in 1H11).

The ‘other’ advances category showed a decrease amounting to R11.42bn in 2H11 compared to R 17.6bn in 2H10.

Retail remained the largest portfolio with mortgage loans the most material product.

21PwC

Growth in gross loans and advances

2H11 v 1H11 2H11 v 2H10

Retail 3.2% 5.1%

Mortgage loans 0.3% 1.0%

Instalment sale and finance leases 4.7% 7.8%

Card debtors -1.2% 2.0%

Overdraft and other demand loans 5.8% 18.3%

Term loans and other revolving credit accounts 12.3% 10.8%

Other loans and advances 12.9% 14.0%

Corporate and investment banking 9.1% 10.5%

Central and other -35.2% -37.1%

Total 5.6% 7.3%


Figure 6.1:Loan portfolio growth

-4

-2

0

2

4

6

8

10

12

829

846

269

355

0 2 4 6 10 12 14

Mortgage loans Card debtors




% g

row

th in

ad

vanc

es f

rom

2H

10 t

o 1

H11

%NPL of advances

14

Gross loans and advances: = R100mn

62

8



0

200 000

400 000

600 000

800 000

1 000 000

1 200 000

1 400 000

1 600 000

Mortgage loans Instalment sale and finance leases

Card debtors

Term loans and revolving credit accounts

Overdrafts and other demand loans

Figure 6.2:Retail advances by product


2H08 1H09 2H09 1H10 2H10

R m

illio

ns

2H111H11


23PwC

Total non-performing loans (NPLs)

Non-performing loans as a percentage of total gross loans advances at 2H11:

Growth in NPL books NPL as a % of loans and advances

2H11 v 1H11 2H11 v 2H10 2H11 1H11 2H10

Retail -11.6% -16.7% 3.8% 4.5% 4.9%


-8.2% -11.7% 0.9% 01% 1.0%

Total -11.0% -15. 9% 4.6% 5.5% 5.9%

The industry has continued on its trajectory of improving credit experience in retail portfolios. This is coupled with marginal growth in mortgage lending and a decline of 1.2% in card lending.

The trend of stricter credit origination on the supply side and consumer caution on the demand side has been observed for at least the previous two reporting seasons, both locally and internationally.

We anticipate this to continue given fears over levels of indebtedness, asset price uncertainty and the inevitable bottoming out of the interest rate cycle. A positive result is the continued growth momentum seen in the instalment sale and finance books, which recorded growth of 4.7% in 2H11.

The level of debt counselling loans in non-performing categories appear to have stabilised and shows potential for improvement in future periods, largely due to the increased terminations of such loans across the banks. Once terminated, a debt counselling loan will typically be placed in non-performing and the debt pursued according to the bank’s collection process. Where data system linkages exist, banks generally perform these terminations on a customer level, which may allow them to preempt a debt counselling customer from reneging on their remaining agreements with the bank.

From an impairment perspective, detailed investigations into this experience is often performed, allowing banks to segment their impairment models and therefore more accurately cater for a changing mix in their portfolios. Where detailed data experience is not deemed adequate or where special investigations into debt counselling experience are not performed, a management overlay to allow for the risk of an adverse outcome relative to the bank’s typical experience should be considered.

An overall improvement has been noted in the corporate and investment banking portfolios with an increase in demand for credit and a decrease in the NPL book of 8.2% from 1H11 to 2H11 and 11.7% from 2H10 to 2H11. Corporate NPLs represent 18.3% of total NPLs, although they represent 36.0% of gross loans and advances. This illustrates the strong credit standing of the South African corporate market.



0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

40 000

45 000

50 000

0

5

10

15

20

25

30

35

40

Figure 6.3: Non-performing loans and level of specific impairment

1H09

ASA FSR NED SBK

NPLs Specific impairment of NPLs

R m

illio

ns

2H09

1H10

2H10

1H11

2H11

1H09

2H09

1H10

2H10

1H11

2H11

1H09

2H09

1H10

2H10

1H11

2H11

1H09

2H09

1H10

2H10

1H11

2H11

Per

cent


Mortgage lending

Mortgage lending across the four banks recorded 0.3% overall growth in 2H11, ranging from a decline of 2.0% (Absa) to growth of 3.1% (Standard Bank). This is largely consistent with the 0.7% growth recorded from 2H10 to 1H11 and suggests a trend of continuing weakness in the consumer credit environment.

NPLs have shown an encouraging improvement, declining to 7.7% from 8.8% in 1H11. This is the most prominent improvement in NPLs over the last three reporting periods. Standard Bank recorded the largest improvement from 8.6% to 6.7%.

Across the major banks, the specific impairment coverage ratio recorded a marginal unfavourable movement from 19.3% to 19.5%. This suggests that the mix of mortgage loans in the non-performing category has deteriorated in terms of asset quality.


Instalment sale and finance leases recorded overall growth of 4.7%, ranging from 1.5% (Absa) to 8.4% (FirstRand). This is encouraging and is in fact the leading source of advances growth for the retail portfolios of all the major banks. NPLs recorded a favourable movement from 4.9% to 4.2%, with Absa leading the improvement (from 8.0% to 6.8%).

The specific impairment coverage ratio showed a significant improvement from 47.1% to 45.9%, which exceeds the improvement observed in previous periods and suggests further solid debt recovery strategies.

25PwC

Credit card portfolio

Card lending across the major banks recorded an overall decline of 1.2%, ranging from a 6.2% decline (Standard Bank) to growth of 2.6% (FirstRand). The major banks have recorded reductions in NPLs of 7.8% to 6.4%, ranging from 6.3% to 6.0% for Nedbank and a favourable change for Absa from 12.1% to 9.4%.

The specific impairment coverage ratio improved across the major banks, from 75.8% to 72.1%, suggesting an improved ability by customers to honour obligations under the low interest rate environment as well as improved collection efficiency by the banks. This has largely been driven by Absa, which recorded an improvement from 71.5% to 64.6%.


The local economy continued to recover in 2011 with many sectors of the economy showing an improvement that contributed to an increase in demand for corporate credit. However, the strain continued in the construction and commercial real estate industries as a result of limited infrastructure spend.

Growth in the corporate banking sector ranged from 2.6% (Nedbank) to 12.0% (Standard Bank) across the major banks from 1H11 to 2H11.

Statistics South Africa has reported that the number of company liquidations decreased from 1 939 to 1 606 from 2010 to 2011. This comprised 220 compulsory (2010: 196) and 1 386 voluntary (2010: 1 743) liquidations.

Corporate NPLs decreased during 2011 at rates that ranged between 13.9% (Absa) and 2.3% (FirstRand) from 1H11 to 2H11, and 24.2% (Standard Bank) and 0.4% (FirstRand) when comparing 2H10 to 2H11.

The specific impairment coverage ratio for the corporate book increased from 39.9% to 43.6%. This suggests that the underlying asset quality in the NPLs has deteriorated in 2011.

The total impairment cover ratio (total balance sheet impairments as a percentage of gross loans and advances) remained consistent at 1.4% from 2H10 to 2H11.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Figure 6.4: Specific and portfolio impairment levels

1H09

ASA FSR NED SBK

Gross loans and advances Portfolio impairment

R m

illio

ns

2H09

1H10

2H10

1H11

2H11

1H09

2H09

1H10

2H10

1H11

2H11

1H09

2H09

1H10

2H10

1H11

2H11

1H09

2H09

1H10

2H10

1H11

2H11



Total cover ratio

2H11 2H10

Absa 2.4% 2.7%

FirstRand 2.0% 2.1%

Nedbank 2.2% 2.3%

Standard Bank 1.9% 2.3%

0

20

40

60

80

100

120

140

160

0

5

10

15

20

25

30

35

40

45

Figure 6.5: Industry impairment levels

Impaired advances Impaired advances as % of total advances

R b

illio

ns

Specific credit impairment as % of impaired advances

Per

cent

Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q4 Q1 Q2

2008 2009 2010

Q4 Q2Q1 Q3 Q3 Q4

2011



27PwC

Capital and funding7


Capital changes

2011 2010 2009

Tier 1 239 507 214 869 188 095

Other 42 376 43 015 48 796

Total capital 281 883 257 884 236 891

Risk-weighted assets 1 882 315 1 744 948 1 658 601

Basel III challenges for South African banks

While the majority of global banks are reporting significant losses due to subdued market conditions brought about by the European sovereign debt crisis, locally the major banks showed a slight growth in their capital adequacy ratios, which increased on average from 14.8% to 15.0%. Tier 1 ratios also increased on average from 12.5% to 12.7%, indicating the relative health of the major banks. The growth in capital adequacy ratios (CARs) is largely due to strong earnings growth.

These increases are very encouraging in the current subdued economic environment, particularly when taking the increased capital requirements brought about by Basel II.5 (effective 1 January 2012) and Basel III (effective 1 January 2013) into consideration. The major banks revealed that the implementation of the new regulations will decrease their CAR by between 0.5% and 2.0%, which is still well above the minimum CAR requirements.

0

2

4

6

8

10

12

14

16

18

Figure 7.1: Major banks capital adequacy levels

ASA FSR NED

Total Tier 1 capital Regulatory minimum

Per

cent

SBK

Total Tier 2 capital

1H09

2H09

1H10

2H10

1H11

2H11

1H09

2H09

1H10

2H10

1H11

2H11

1H09

2H09

1H10

2H10

1H11

2H11

1H09

2H09

1H10

1H11

2H11

2H10



29PwC

*Nedbank and Standard Bank did not provide separate estimates for the impact of Basel II.5 and Basel III. We have assumed the impact is shared equally between the two new regulations.

Source: Based on banks’ results presentations

Figure 7.2: Reported estimates of Basel III’s impact

Per

cent

12.0

12.5

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

17.0

BII BII.5 BIII Final BII BII.5 BIII Final BII BII.5 BIII Final BII BII.5 BIII Final

ASA FRB NED* SBK*


Challenges on the horizon

Despite the overall positive picture, there are a number of uncertainties associated with Basel III that could further impact on the major bank’s profitability and capital adequacy. Some of the more pertinent issues are discussed in further detail below.

The impact of clearing over-the-counter (OTC) derivatives through a central clearing counterparty (CCP) could fundamentally change the structure of the derivatives market and risk exposures of individual clearing banks in South Africa. In its simplest form, the capital rules on CCP require banks to hold capital on their share of the risk exposures of all clearing member banks of the CCP.

In order to estimate the impact of this, one would require an estimate of the total risk in the system. This would necessitate making assumptions about which OTC derivatives are more likely to be cleared through the CCP. The capital requirements would also be influenced by the value of the default fund set up to protect clearing members, which, at this stage, has not yet been established in South Africa.

Another major challenge relates to how global banks that have existing clearing platforms will interact with local banks. For them, moving to a domestic solution could present many operational and technological challenges. Global banks might even find that such a change results in reduced netting and, by implication, increased capital requirements, which could potentially impact on the willingness of global banks to trade with local banks.

The Basel rules on CCP become effective on 1 January 2013. Given the many uncertainties and operational challenges associated with the CCP requirements, it is currently unclear how this deadline will be met. The banks, the JSE and the SARB continue to work together to ensure a seamless transition to the CCP requirements.

In the event that OTC derivatives are not cleared through a CCP, counterparty credit risk capital associated with derivative positions will increase significantly. In particular, credit valuation adjustments and asset value correlation adjustments associated with derivative positions with financial institutions could reduce the Tier 1 ratio by as much as 80 basis points. Banks could respond by increasing prices, which would affect corporate institutions that employ hedging strategies.

Another challenge for the banks is the current proposal to fully deduct banks’ own credit spread at inception from available capital. Basel III originally required banks to neutralise any gains made on the migration of their own credit risk. It did not require impairment against capital for credit risk at inception.

However, recent guidance issued by the Basel Committee on Banking Supervision (BCBS) stipulates that banks are required to impair available capital based on the credit risk inherent in funding instruments at inception, even if no gains have been recognised by the bank on these instruments.

Apart from being conservative, this new approach is favoured by the BCBS as a result of its relative simplicity. However, the determination of debit valuation adjustments (DVA) for a portfolio of derivative contracts is anything but simple and would require banks to develop complex modelling methodologies.

While some analysts are also calling for the accounting and regulatory rules to converge on this issue, others have criticised the validity of DVA as an additional reserve in the first place.

The structural features of the South African market make it difficult for South African banks to meet the Basel III funding requirements.

In addition to increased capital requirements, the Basel Committee introduced global liquidity standards comprising a stressed liquidity coverage ratio (effective 1 January 2015) and a longer-term NSFR requirement (effective 1 January 2018). However, more work will be required to ensure compliance with the stringent reserve requirements by 1 January 2015.

31PwC

Source: BA 900

Figure 7.3: Liquid assets as a percentage of total assets

0

2

4

6

8

10

12

14

16

ASA

Per

cent

Q1 Q2 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1

2010 2011 2012

Q3 Q4

2009

FRB NED SBK

Liquid assets are assumed to consist primarily of South African Banks’ notes and coins, deposits with the SARB, Marketable RSA government stock, securities (including debentures) issued by the SARB, T bills, SARB bills and loans granted under reverse repurchase agreements where the underlying is RSA government stock.

An implicit assumption in the NSFR requirements relates to the stability of wholesale and retail deposits. More specifically, the requirements assume that retail deposits are more stable than wholesale deposits.

The South African banking sector is characterised by certain structural features, such as a low discretionary savings rate and a higher degree of contractual savings that are captured by institutions such as pension funds, provident funds and asset managers.

A structural funding task team has been established and mandated to assess the impact and subsequently make recommendations on how the banking industry should respond to the proposed regulations.

We have noticed an increase in long-term wholesale funding as banks respond to the NSFR requirements.

Regulatory change will continue to consume significant management time in the foreseeable future.

The Basel III capital and liquidity reforms will fundamentally impact profitability and require transformation of the business models of many banks. Of the various businesses in which banks are engaged, capital markets businesses will be most impacted. Many bank executives have also accepted that regulatory change is no longer a once-off event and will be part of business as usual for running a bank for the foreseeable future.

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 1H 2H

0

500 000

1 000 000

1 500 000

2 000 000

2 500 000

0

5

10

15

20

25

30

35

40

45

50

Figure 7.5: Industry deposit mix

Deposits % Retail

R b

illio

ns

% Government

Per

cent

% Other

% Corporate % Wholesale

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011


Source: BA 900

Figure 7.4: Growth in long-term funding

0

5

10

15

20

25

30

35

ASA

Per

cent

Q1

2001

FRB NED SBK

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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 1H 2H

0

500 000

1 000 000

1 500 000

2 000 000

2 500 000

0

5

10

15

20

25

30

35

40

45

50

Figure 7.5: Industry deposit mix

Deposits % Retail

R b

illio

ns

% Government

Per

cent

% Other

% Corporate % Wholesale

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: SARB

33PwC

Banking banana skins 20128


PwC sponsors the biennial Banking Banana Skins survey conducted by

the Centre for the Study of Financial Innovation. Each survey identifies

potential sources of risks to banks and then ranks them by severity. Also

included are industry members’ views and perceptions about the risks they

face, the soundness of financial markets, and other pressing issues.

Download the survey:

http://www.pwc.co.za/en/publications/banana-skins.jhtml

The fragility of the world economy with the possibility of a return to the recession poses the greatest risk to the banking industry.

The Centre for the Study of Financial Innovation’s (CSFI) annual Banking Banana Skins report, produced in association with PwC, places macro-economic risk and credit losses at the top of the list of 30 possible risks to banks globally and in South Africa.

The report describes the risk outlook for the banking industry at the turn of the year, a time of unprecedented stress in the financial markets, and ranks 30 risks according to their severity. The findings are based on responses from more than 700 bankers, banking regulators and close observers of the banking industry in 58 countries, including seven from South Africa.

The concerns of banks have changed over the past 15 years. The 1990s were largely dominated by strategic issues, such as new developments in technology and competition. The 2008 survey, conducted at the height of the financial crisis, brought the focus sharply onto credit and market risks, propelling two new entrants to the top of the charts: liquidity and credit spreads. The 2010 report showed a preoccupation with the crash aftermath, namely lingering debt and funding problems.

35PwC

The Banking Banana Skins 2012 survey shows that banking executives from regions such as Latin America, Africa, Asia and the Far East are more positive in their outlook about the financial services sector than the industrial countries, as they are in better health. Concerns about the global macro economy is their biggest worry.

While South Africa’s banks may be better prepared than those in other jurisdictions to handle some of these risks, the economy is too intertwined with the global banking system to remain totally unaffected, particularly if the global economy moves into another recession.

Bankers and investors are also concerned about the contagion effect of a default in troubled markets, particularly those in the US and Europe.

While banks in the rest of the world cite the adequacy of liquidity and capital as major concerns, South Africa’s banking industry faces different concerns to those of its international counterparts.

The report shows that one of the top concerns facing South Africa’s banking industry is the sector’s growing dependence on the use of technology (ranked third). Banks are increasingly realising that they have to invest in modern technology to improve customer service and to keep up with competitors in a highly competitive environment. They are well aware that investing in technology presents both benefits and risks.

Banks in South Africa are also worried about the increasing level of fraud taking place in the industry. The risks of fraud and criminality are placed in fourth and fifth places respectively locally, compared to 27th and 24th respectively globally. Insider fraud and account takeover are the two most likely areas of exposure for banks. Fraudsters have become more sophisticated and in some instances are operating as organised syndicates, even targeting the employees of banks.

Banks are looking for robust fraud prevention and detection measures. Prevention includes policies, procedures and training of employees to stop fraud taking place. Detection focuses on various techniques that recognise whether fraud has taken place or if it is occurring. Common detection controls include data analysis that raises ‘red flags’ on abnormal transactions and effective whistleblower procedures.

Worldwide, the banking sector continues to see new regulations as one of the top concerns facing the industry. The most significant change taking place in the South African banking industry will be the introduction of Basel III, which is expected to change business models as banks try to comply with the more stringent capital rules on their trading activities and seek long-term funding that meets the requirements of the new liquidity measures being proposed.

Banking Banana Skins 2012

Global (2010 ranking in brackets) South Africa (no 2010 date available)

1. Macroeconomic risk (4) 1. Macroeconomic risk

2. Credit risk (2) 2. Credit risk

3. Liquidity (5) 3. High dependence on technology

4. Capital availability (6) 4. Criminality

5. Political interference (1) 5. Fraud

6. Regulation (3) 6. Business Continuation

7. Profitability (-) 7. Pricing of risk

8. Derivatives (7) 8. Regulation

9. Corporate governance (12) 9. Human Resources

10. Quality of risk management (8) 10. Political interference



Furthermore, banks will have to come to terms with the provisions of the new Companies Act, compliance with proposed changes to International Financial Reporting Standards and the future enactment of the Protection of Personal Information Bill.

A question about human resources was included in the Banana Skins survey for the first time this year. This was in response to growing concern about banks losing ‘talent’ for a number of reasons since the financial crisis of 2008. Talent risk in South Africa was cited as a significant concern (ninth), whereas internationally it was not perceived to be a major problem (28th). Concerns centre largely around squeezes in remuneration, the recruitment and retention of high-quality staff and attracting young talent into the industry.

Concerns about the growth of political interference in the industry have declined from the top position it occupied in the previous survey. The study suggests that this could be because intrusion by governments in banking is now a fact of life globally, be it in the form of nationalisation, tougher regulation, new taxes or pressure on business decisions.

Although banks have made significant changes to their organisations and the way in which they run their businesses in the light of the 2008 financial crisis, the latest set of risks have become more challenging for the sector.

37PwC

Global banking reaches digital tipping point9


Traditional banking is facing its steepest challenge in over a generation, with its tipping point centred on digital communication.

Digital banking set to be the norm by 2015

Digital banking is set to overtake the branch channel as the main way in which customers interact with their bank by 2015. According to The new digital tipping point, a report recently issued by PwC in London, many banks are missing a vital new source of revenue growth as they have been too slow to respond to the digital innovations that have radically changed the face of business models.

Despite a willingness on the part of consumers to pay a higher premium for digital bank offerings, many banks are still providing traditional mobile and internet banking services.

As the number of customers who use the internet has exploded, banks

find themselves constantly having to adapt to satisfy the needs of their

stakeholders.

PwC surveyed approximately 3 000 banking customers in nine different

markets to understand customers’ needs, attitudes and behaviours with

regard to digital communication.

Our insights from this research can help banks harness the power of

the new and improved digital market, not just by cutting costs, but by

deepening customer relationships. The new digital tipping point explores

these insights and the opportunities that exist for banks.

Explore the survey data and download the report:

http://www.pwc.com/gx/en/banking-capital-markets/publications/

digital-banking-survey.jhtml

39PwC

The report found that most consumers are willing to pay up to £10 a month for digital banking services if they believe they offer convenience and value. In particular, customers are willing to pay for innovative digital offerings such as social media notifications, an electronic wallet for loyalty cards and financial tools, provided they offer convenience and value.

The study was carried out among 3 000 banking customers across nine developed and emerging markets, including China, India, Mexico and the United Arab Emirates (UAE), as well as developed markets such as the UK, Canada, France and Poland.

Having regard to the potential uptake of digital products and services, particularly among younger and more affluent customers, there is an opportunity for banks to grow their profit margins while serving their customers in a way that they want.

Before the financial crisis, banks relied largely on financial leverage to create shareholder value. However, in the light of the recent economic uncertainty, increased regulatory intervention and competitive challenges, banks have been forced to deleverage and look for other sources of value.

The study suggests several reasons why customers are changing their behaviour in looking towards digital financial products. Firstly, the traditional role of banks as the financial expert has been replaced by the rapid emergence of social media and mobile channels. This has seen consumers increasingly turn to their peers for information and advice, rather than to financial experts in banks.

Secondly, financial consumers are more savvy today thanks to their easy access to research, data and ‘expert’ views. As more financial services customers become ‘self-directed’, they can rely less upon traditional sources of advice.

Thirdly, the comparison and purchase of alternative financial products and services online is now straightforward and widespread. This has opened up a wide range of choices for consumers, some outside of traditional banks, such as peer-to-peer lending.

Lastly, the rise of social media has allowed a single consumer voice to be amplified to a large degree. For instance, stories of bad customer experience have spread through the media and usually cause irreparable damage to associated brands.

The report recommends that a new and more customer-centric business model be adopted by banks. It suggests that the use of digital products and services can play an instrumental role in achieving this strategy as the preference for digital is permeating across all customer segments globally, more particularly for Generation Y (those people born in the 1980s and 1990s).

The internet is now widely used by all customer segments globally to purchase financial services products. The report found that a significant percentage (69%) of consumers is using the internet to purchase financial products.

Although fewer consumers use mobile banking (33%) to purchase financial products, this channel is expected to follow a similar usage curve to internet banking, with China, India and the UAE leading the trend in terms of adoption.

Not surprisingly, Generation Y was found to be using mobile channels for banking more than any other consumer segment. For these customers, a bank’s digital services will be more central to their decision-making process than branch location and brand.

Customers across all groups continue to put their trust in banks to manage their financial affairs, despite their continuing relative unpopularity. When asked who they would trust with their current accounts, customers still prefer banks to any other financial services providers.

Despite new digital services and products opening up the banking system to a number of new players, there is little evidence to suggest that they will be successful in displacing banks as the primary provider of financial services, particularly in markets where banking is widely accessible.

The study shows that that the majority of respondents (61%) still trust their banks over other providers to provide their current account. However, the study suggests that new entrants such as mobile payment providers will continue to act as catalysts for change in the retail banking space. Banks may need to look for strategic acquisitions or partnerships with these firms in order to deliver on the digital offerings consumers can expect.

Banks are faced with the dilemma of having to choose one of two available paths: whether to stay with traditional banking models that have served them well until now, or embrace change and serve the customer in a way that the customer wants.


The banks that offer a differentiated digital experience, with advice and relationship management elements tailored to the individual customer, will secure deeper engagement and more profitable relationships with their customers.

South African banks ahead of the curve

The South African digital banking environment is very different from those of Europe and North America, largely because a low proportion of banking customers use sophisticated products.

Low-cost bank accounts aimed at the mass market offer little that improves on traditional cash management practices, and many users of these accounts rely on retail money transfer services as opposed to electronic transfers.

At the same time, the mass market is strongly attracted to cell phone banking due to both high convenience and low cost. However, social media integration is not remotely a consideration in this segment.

At the other end of the economic spectrum, the picture is dramatically different. Here, we are seeing the beginnings of mass defections away from banks offering only traditional online products and services.

The front runner here is FNB, which has embarked on a strong social media campaign at the same time as launching a range of apps for advanced mobile devices, namely smartphones and tablet computers. FNB is 6-12 months ahead of other South African banks – and probably many international ones – in their execution.

While FNB may be in the lead strategically, they are not the leader in customer numbers, which indicates that their rivals still have the edge in other areas. This is a warning sign that new approaches to digital banking are not only about innovation, but must complement all facets of the business.

Most banks are exploring ways of evolving social media and mobile strategies in a way that does not disrupt their processes, and are currently in a phase of both internal negotiation and temporary compromise.

Arthur Goldstuck Managing Director World Wide Worx

World Wide Worx is a leading independent technology research and strategy organisation that focuses on technology in business strategy. Arthur Goldstuck is regarded as South Africa’s foremost authority on internet and mobile technology trends.

41PwC

Key banking statistics10


Summary financial information - FY11 (R millions)

ASA FSR NED SBK

2011 2010 2009 2011 2010 2009 2011 2010 2009 2011 2010 2009

Balance sheet

Total assets 786 719 730 020 710 796 763 514 695 809 802 389 648 127 608 718 570 703 1 497 430 1 337 521 1 297 788

Gross loans and acceptances 573 066 536 275 555 353 508 253 461 503 422 129 507 545 486 499 460 099 818 996 730 131 742 173

Total deposits 479 299 403 004 392 906 595 200 543 713 487 929 521 115 490 440 469 355 876 777 785 601 768 548

Risk-weighted assets 424 489 22 713 386 264 415 121 378 490 346 049 331 980 323 681 326 466 710 725 620 064 599 822

Asset quality & provisioning

Non-performing loans 35 536 39 641 36 089 18 366 21 117 23 121 23 073 26 765 27 045 33 403 42 701 48 376

Impairments -12 131 -13 902 -13 158 -9 995 -9 844 -10 991 -11 497 -11 226 -9 798 -15 185 -17 106 -18 666

Collective provisions -2 254 -2 087 -3 222 -3 779 -3 117 -3 703 -2 748 -2 154 -1 968 -5 410 -4 884 -5 588

Individually assessed provisions -9 877 -11 815 -9 936 -6 216 -6 727 -7 288 -8 749 -9 072 -7 830 -9 775 -12 222 -13 078

Non-performing loans (% of advances) 6.2% 7.3% 6.5% 3.6% 4.6% 5.5% 4.5% 5.5% 5.9% 4.1% 5.8% 6.5%

Impairment charge (% of average advances) 0.8% 0.8% 1.5% 0.8% 0.9% 1.5% 1.1% 1.3% 1.4% 0.9% 1.0% 1.3%

Impairment coverage ratio 34.1% 35.1% 36.5% 54.4% 46.6% 47.5% 49.8% 41.9% 36.2% 45.5% 40.1% 38.6%

Implied loss given default 27.8% 29.8% 27.5% 33.8% 31.9% 31.5% 37.9% 33.9% 29.0% 29.3% 28.6% 27.0%

Profit & loss analysis (i)

Net interest income 24 429 23 340 21 854 22 635 17 796 12 688 18 034 16 608 16 306 29 027 28 927 31 493

Non-interest income 21 403 19 474 20 232 23 436 26 046 24 193 15 412 13 215 11 906 44 731 44 054 41 620

Total operating income 45 832 42 814 42 086 46 071 43 842 36 881 33 446 29 823 28 212 73 758 72 981 73 113

Total operating expenses -26 581 -24 949 -23 227 -25 484 -25 494 -22 113 -19 424 -17 045 -15 538 -46 519 -47 519 -43 589

Core earnings 19 251 17 865 18 859 20 587 18 348 14 768 14 022 12 778 12 674 27 239 25 462 29 524

Impairment charge -5 081 -6 005 -8 967 -3 976 -4 738 -7 556 -5 331 -6 188 -6 634 -6 436 -7 524 -12 097

Other income/(expenses) 40 -9 -50 763 524 980 -14 -90 679 223 489 -9

Discontinued operations 591 641

Income tax expenses -4 026 -3 262 -2 340 -4 625 -3 814 -2 439 -2 174 -1 364 -1 307 -5 695 -4 965 -4 620

Profit for the period 10 184 8 589 7 502 12 749 10 911 5 753 6 503 5 136 5 412 15 972 13 462 12 798

Attributable earnings 9 674 8 118 6 840 14 062 16 994 6 715 7 200 4 811 4 826 13 425 10 774 11 054

Headline earnings 9 719 8 041 7 621 10 452 10 004 6 878 6 148 4 900 4 277 13 599 10 969 11 253

Key data

Other operating income (% of total income) 46.7% 45.5% 48.1% 50.9% 63.5% 65.6% 46.1% 44.3% 42.2% 60.6% 60.4% 56.9%

Net interest margin (% of total assets) 3.3% 3.2% 2.9% 3.1% 2.1% 1.5% 3.2% 2.9% 2.9% 2.9% 2.6% 3.2%

Net interest margin (% of average interest earning advances) 4.1% 4.0% 3.7% 4.8% 3.6% 2.5% 3.5% 3.4% 3.4% 4.0% 3.8% 4.5%

Standardised efficiency ratio 55.5% 56.5% 53.0% 54.0% 59.1% 59.3% 56.6% 55.7% 53.5% 61.2% 63.1% 57.3%

Return on equity 16.4% 14.3% 15.1% 19.5% 19.9% 13.8% 13.6% 11.1% 10.8% 14.3% 12.6% 13.4%

Return on average assets 1.3% 1.1% 1.0% 1.5% 1.3% 0.8% 1.0% 0.8% 0.8% 1.2% 1.0% 1.0%

Total number of staff 35 200.0 36 770 36 150 35 526 34 200 38 760 28 494 27 525 27 037 52 127 53 351 51 411

Capital ratios

Tier 1 14.10% 12.80% 12.70% 14.0% 13.60% 13.50% 12.60% 11.7% 3.4% 12.00% 12.90% 11.80%

Tier 2 2.60% 2.70% 2.90% 1.4% 1.70% 2.10% 2.70% 3.3% 14.9% 2.30% 2.40% 2.80%

Total 16.70% 15.50% 15.60% 15.40% 15.30% 15.60% 15.30% 15.00% 18.30% 14.30% 15.30% 14.60%

43PwC

Sum

ma

ry fi

na

nci

al i

nfo

rma

tio

n -

2H

11

(R

mil

lio

ns)

AS

AFS

RN

ED

SB

K

2H11

1H

112H

101H

102H

111H

112H

101H

102H

111H

112H

101H

102H

111H

112H

101H

10

Bal

ance

sh

eet

Tota

l ass

ets

786

719

707

327

730

020

718

204

763

514

700

146

695

809

845

240

648

127

609

875

608

718

590

847

1 49

7 43

01

379

183

1 33

7 52

11

320

267

Gro

ss lo

ans

and

ac

cep

tanc

es

573

066

526

371

536

275

557

439

508

253

474

566

461

503

443

750

507

545

483

384

486

499

472

292

818

996

759

488

730

131

733

145

Tota

l dep

osits

47

9 29

941

5 69

540

3 00

439

8 64

759

5 20

055

3 65

754

3 71

351

2 46

952

1 11

549

3 97

449

0 44

048

0 41

887

6 77

785

1 65

078

5 60

177

3 12

8

Ris

k-w

eigh

ted

as

sets

42

4 48

940

8 39

742

2 71

339

5 46

141

5 12

138

5 19

037

8 49

034

1 60

833

1 98

032

3 56

232

3 68

133

1 57

771

0 72

565

4 40

562

0 06

462

0 97

1

Ass

et

qua

lity

&

pro

visi

oni

ng

Non

-per

form

ing

loan

s 35

536

39 2

5839

641

38 9

0318

366

19 7

9021

117

22 2

0523

073

25 2

4126

765

28 3

6733

403

38 3

7942

701

41 6

44

Imp

airm

ents

-1

2 13

1-1

3 50

2-1

3 90

2-1

4 33

2-9

995

-9 9

73-9

844

-10

731

-11

497

-11

466

-11

226

-10

989

-15

185

-16

016

-17

106

-18

464

Col

lect

ive

pro

visi

ons

-2 2

54-2

123

-2 0

87-2

743

-3 7

79-3

457

-3 1

17-3

566

-2 7

48-2

440

-2 1

54-1

976

-5 4

10-5

133

-4 8

84-5

266

Ind

ivid

ually

as

sess

ed

pro

visi

ons

-9 8

77-1

1 37

9-1

1 81

5-1

1 58

9-6

216

-6 5

16-6

727

-7 1

65-8

749

-9 0

26-9

072

-9 0

13-9

775

-10

883

-12

222

-13

198

Non

-per

form

ing

loan

s (%

of

adva

nces

)6.

2%7.

3%7.

3%7.

0%3.

6%4.

2%4.

6%5.

0%4.

5%5.

2%5.

5%6.

0%4.

1%5.

1%5.

8%5.

7%

Imp

airm

ent

char

ge

(% o

f ave

rage

ad

vanc

es)

0.8%

1.2%

0.8%

1.5%

0.8%

0.9%

0.9%

1.3%

1.1%

1.2%

1.3%

1.5%

0.9%

0.8%

1.0%

1.0%

Imp

airm

ent

cove

rage

rat

io34

.1%

34.4

%35

.1%

36.8

%54

.4%

50.4

%46

.6%

48.3

%49

.8%

45.4

%41

.9%

38.7

%45

.5%

41.7

%40

.1%

44.3

%

Imp

lied

loss

giv

en

def

ault

27.8

%29

.0%

29.8

%29

.8%

33.8

%32

.9%

31.9

%32

.3%

37.9

%35

.8%

33.9

%31

.8%

29.3

%28

.4%

28.6

%31

.7%


AS

AFS

RN

ED

SB

K

2H11

1H

112H

101H

102H

111H

112H

101H

102H

111H

112H

101H

102H

111H

112H

101H

10P

rofi

t &

loss

an

alys

is

Net

inte

rest

inco

me

12 8

0711

622

12 0

4711

293

11 9

0510

730

9 77

18

025

9 35

18

683

8 52

68

082

14 6

0614

421

14 3

8614

541

Non

-int

eres

t in

com

e10

723

10 6

809

761

9 71

311

455

11 9

8111

863

14 1

838

273

7 13

9 7

057

6 15

822

347

22 3

8423

573

20 4

81

Tota

l op

erat

ing

inco

me

23 5

3022

302

21 8

0821

006

23 3

6022

711

21 6

3422

208

17 6

2415

822

15

583

14 2

40

36 9

5336

805

37 9

5935

022

Tota

l op

erat

ing

exp

ense

s-1

3 82

0-1

2 76

1-1

3 24

9-1

1 70

0-1

3 38

0-1

2 10

4-1

2 34

8-1

3 14

6-1

0 33

4-9

090

-8 9

43-8

102

-23

487

-23

032

-25

549

-21

970

Cor

e ea

rnin

gs9

710

9 54

18

559

9 30

69

980

10 6

079

286

9 06

27

290

6 73

26

640

6 13

813

466

13 7

7312

410

13 0

52

Imp

airm

ent

char

ge-2

179

-2 9

02-2

301

-3 7

04-1

961

-2 0

15-2

277

-2 4

61-2

539

-2 7

92-2

944

-3 2

44-3

466

-2 9

70-3

734

-3 7

90

Oth

er in

com

e/(e

xpen

ses)

1228

-24

1540

136

221

431

02

-16

-84

-610

811

522

026

9

Dis

cont

inue

d

oper

atio

ns-

-59

164

1

Inco

me

tax

exp

ense

s-2

185

-1 8

41-1

756

-1 5

06-2

168

-2 4

57-1

968

-1 8

46-1

169

-1 0

05-7

90-5

74-2

643

-3 0

52-2

529

-2 4

36

Pro

fit fo

r th

e p

erio

d5

358

4 82

64

478

4 11

16

252

6 49

75

255

5 65

63

584

2 91

92

822

2 31

48

106

7 86

66

367

7 09

5

Att

ribut

able

ea

rnin

gs5

093

4 58

14

276

3 84

26

067

7 99

512

070

4 92

44

436

2 76

42

661

2 15

06

770

6 65

54

877

5 89

7

Hea

dlin

e ea

rnin

gs

from

con

tinui

ng

oper

atio

ns

5 12

44

595

4 17

93

862

5 63

94

813

5 04

34

961

3 37

62

772

2 74

72

153

7 03

76

562

5 10

15

868

Key

dat

a

Oth

er o

per

atin

g in

com

e (%

of t

otal

in

com

e)45

.6%

47.9

%44

.8%

46.2

%49

.0%

52.8

%54

.8%

63.9

%46

.9%

45.1

%45

.3%

43.2

%60

.5%

60.8

%62

.1%

58.5

%

Net

inte

rest

mar

gin

(% o

f tot

al a

sset

s)3.

6%3.

5%3.

3%3.

2%3.

3%3.

1%2.

5%1.

9%3.

3%3.

1%1.

6%1.

5%2.

9%2.

6%2.

6%2.

7%

Net

inte

rest

mar

gin

(% o

f ave

rage

in

tere

st e

arni

ng

adva

nces

)4.

2%4.

1%4.

2%3.

9%4.

6%4.

9%4.

3%4.

1%3.

5%3.

4%3.

4%3.

3%4.

1%3.

9%4.

0%4.

1%

Sta

ndar

dis

ed

effic

ienc

y ra

tio56

.3%

55.0

%58

.8%

54.0

%58

.9%

54.3

%55

.3%

60.1

%57

.2%

55.9

%56

.0%

55.3

%61

.9%

60.5

%65

.1%

60.9

%

Ret

urn

on e

qui

ty16

.6%

16.2

%15

.2%

15.0

%19

.5%

19.4

%18

.0%

18.8

%15

.0%

12.2

%12

.9%

12.2

%14

.1%

14.5

%11

.5%

13.5

%

Tota

l num

ber

of

staf

f 35

200

36

535

36 7

7036

536

35

526

34 6

12

34 2

0034

904

28 4

9428

210

27 5

2526

924

52 1

2751

706

53 3

5152

768

Cap

ital

ra

tio

s

Tier

1

14.1

%13

.9%

12.8

%13

.1%

14.0

%15

.0%

13.6

%13

.5%

12.6

%12

.4%

11.7

%11

.5%

12.0

%12

.4%

12.9

%11

.8%

Tier

22.

6%2.

8%2.

7%2.

7%1.

4%1.

5%1.

7%2.

1%2.

7%2.

8%3.

3%3.

3%2.

3%2.

4%2.

4%2.

8%

Tota

l16

.7%

16.7

%15

.5%

15.8

%15

.4%

16.5

%15

.3%

15.6

%15

.3%

15.2

%15

.0%

14.8

%14

.3%

14.8

%15

.3%

14.6

%

Sum

ma

ry fi

na

nci

al i

nfo

rma

tio

n -

2H

11

(R

mil

lio

ns)

45PwC

AS

AFS

RN

ED

SB

K

2H11

1H

112H

101H

102H

111H

112H

101H

102H

111H

112H

101H

102H

111H

112H

101H

10P

rofi

t &

loss

an

alys

is

Net

inte

rest

inco

me

12 8

0711

622

12 0

4711

293

11 9

0510

730

9 77

18

025

9 35

18

683

8 52

68

082

14 6

0614

421

14 3

8614

541

Non

-int

eres

t in

com

e10

723

10 6

809

761

9 71

311

455

11 9

8111

863

14 1

838

273

7 13

9 7

057

6 15

822

347

22 3

8423

573

20 4

81

Tota

l op

erat

ing

inco

me

23 5

3022

302

21 8

0821

006

23 3

6022

711

21 6

3422

208

17 6

2415

822

15

583

14 2

40

36 9

5336

805

37 9

5935

022

Tota

l op

erat

ing

exp

ense

s-1

3 82

0-1

2 76

1-1

3 24

9-1

1 70

0-1

3 38

0-1

2 10

4-1

2 34

8-1

3 14

6-1

0 33

4-9

090

-8 9

43-8

102

-23

487

-23

032

-25

549

-21

970

Cor

e ea

rnin

gs9

710

9 54

18

559

9 30

69

980

10 6

079

286

9 06

27

290

6 73

26

640

6 13

813

466

13 7

7312

410

13 0

52

Imp

airm

ent

char

ge-2

179

-2 9

02-2

301

-3 7

04-1

961

-2 0

15-2

277

-2 4

61-2

539

-2 7

92-2

944

-3 2

44-3

466

-2 9

70-3

734

-3 7

90

Oth

er in

com

e/(e

xpen

ses)

1228

-24

1540

136

221

431

02

-16

-84

-610

811

522

026

9

Dis

cont

inue

d

oper

atio

ns-

-59

164

1

Inco

me

tax

exp

ense

s-2

185

-1 8

41-1

756

-1 5

06-2

168

-2 4

57-1

968

-1 8

46-1

169

-1 0

05-7

90-5

74-2

643

-3 0

52-2

529

-2 4

36

Pro

fit fo

r th

e p

erio

d5

358

4 82

64

478

4 11

16

252

6 49

75

255

5 65

63

584

2 91

92

822

2 31

48

106

7 86

66

367

7 09

5

Att

ribut

able

ea

rnin

gs5

093

4 58

14

276

3 84

26

067

7 99

512

070

4 92

44

436

2 76

42

661

2 15

06

770

6 65

54

877

5 89

7

Hea

dlin

e ea

rnin

gs

from

con

tinui

ng

oper

atio

ns

5 12

44

595

4 17

93

862

5 63

94

813

5 04

34

961

3 37

62

772

2 74

72

153

7 03

76

562

5 10

15

868

Key

dat

a

Oth

er o

per

atin

g in

com

e (%

of t

otal

in

com

e)45

.6%

47.9

%44

.8%

46.2

%49

.0%

52.8

%54

.8%

63.9

%46

.9%

45.1

%45

.3%

43.2

%60

.5%

60.8

%62

.1%

58.5

%

Net

inte

rest

mar

gin

(% o

f tot

al a

sset

s)3.

6%3.

5%3.

3%3.

2%3.

3%3.

1%2.

5%1.

9%3.

3%3.

1%1.

6%1.

5%2.

9%2.

6%2.

6%2.

7%

Net

inte

rest

mar

gin

(% o

f ave

rage

in

tere

st e

arni

ng

adva

nces

)4.

2%4.

1%4.

2%3.

9%4.

6%4.

9%4.

3%4.

1%3.

5%3.

4%3.

4%3.

3%4.

1%3.

9%4.

0%4.

1%

Sta

ndar

dis

ed

effic

ienc

y ra

tio56

.3%

55.0

%58

.8%

54.0

%58

.9%

54.3

%55

.3%

60.1

%57

.2%

55.9

%56

.0%

55.3

%61

.9%

60.5

%65

.1%

60.9

%

Ret

urn

on e

qui

ty16

.6%

16.2

%15

.2%

15.0

%19

.5%

19.4

%18

.0%

18.8

%15

.0%

12.2

%12

.9%

12.2

%14

.1%

14.5

%11

.5%

13.5

%

Tota

l num

ber

of

staf

f 35

200

36

535

36 7

7036

536

35

526

34 6

12

34 2

0034

904

28 4

9428

210

27 5

2526

924

52 1

2751

706

53 3

5152

768

Cap

ital

ra

tio

s

Tier

1

14.1

%13

.9%

12.8

%13

.1%

14.0

%15

.0%

13.6

%13

.5%

12.6

%12

.4%

11.7

%11

.5%

12.0

%12

.4%

12.9

%11

.8%

Tier

22.

6%2.

8%2.

7%2.

7%1.

4%1.

5%1.

7%2.

1%2.

7%2.

8%3.

3%3.

3%2.

3%2.

4%2.

4%2.

8%

Tota

l16

.7%

16.7

%15

.5%

15.8

%15

.4%

16.5

%15

.3%

15.6

%15

.3%

15.2

%15

.0%

14.8

%14

.3%

14.8

%15

.3%

14.6

%

Figure 10.1: GDP growth (%)

-7

-5

-3

-1

1

3

5

7

9

Per

cent

2008 2009 20102006 2007 2011

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

0

200

400

600

800

1 000

1 200

Small Medium Large

Figure 10.2:Absa House Price Index

4.31%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2010 20112009

Source: Statistics SA


Figure 10.3: Absa House Price Indices (nominal y/y % change)

-10

-5

0

5

10

15

20

25

30

35

40

Small Medium

Per

cent

2005 2006 20072004

Large

2008 2009 20112010

Figure 10.4: New vehicles sold (2000 = 100)

100

120

140

160

180

200

220

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2Q3 Q4

2008 2009 2010 20112006 2007

Per

cent

Q3 Q4

Source: Absa

Source: SARB

47PwC

Figure 10.5: Long-term bond yields

0

2

4

6

8

10

12

14

16

18

1996

1998

2000

2002

2004

2006

2008

2010

USA 10-year RSA

Per

cent

2011

0

2

4

6

8

10

12

14

Figure 10.6: Interest rates

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

2006 2007 2008 2009 2010 2011

Repo rate R175 Bond yield

Per

cent

Q4

Q1

2012

Source: SARB

Source: SARB


Figure 10.7: Industry credit impairments as a percentage of total assets

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1992

1994

2000

2002

2004

2006

2008

2010

Per

cent

2011

1996

1998

0

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Total assets Specific impairment %

Per

cent

2008 2009 2010 2011

Figure 10.8: Industry specific credit impairments

R b

illio

ns

Source: SARB

Source: SARB

49PwC

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3

Figure 10.9: Industry credit extension

R t

rilli

ons

2008 2009 2010 2011

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Q3 Q4

2007

Figure 10.10: Quarterly growth in mortgage advances

0

10

20

30

40

50

60

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q4Q2 Q3

2008 2009 2010 20112006 2007

R b

illio

ns

Q1 Q4Q2 Q3

Source: SARB

Source: SARB


Contact11

51PwC

Tom Winterboer Financial Services Leader Southern Africa and 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

Costa Natsas Banking & Capital Markets Partner

Keith Ackerman Banking & Capital Markets Partner

Emmarentia Naude Banking & Capital Markets Associate Director

Irwin Lim ah Tock Banking & Capital Markets Associate Director

Rivaan Roopnarain Banking & Capital Markets Trainee Accountant

©2012 PricewaterhouseCoopers (“PwC”), the South African firm. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers in South Africa, which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity and does not act as an agent of PwCIL. (12-10693)

Documents

South Africa â€“ major banks analysis