SA banks are strong and the results certainly indicate that strength

‘We’ve certainly seen strong cost management with … the combined cost-to-income ratio’: Francois Prinsloo – PwC.

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SIMON BROWN: I’m chatting now with Francois Prinsloo, PwC Africa’s Banking and Capital Markets leader. Francois, I appreciate the early morning time. The major banks’ numbers are all out. All in all, in the report that PwC put out last week the line that really I think stands out is the ‘underlying strength of South Africa’s major banks’. Our banks are strong and the results certainly indicate that strength within their structures and systems and profitability.

FRANCOIS PRINSLOO: Yes, definitely, Simon. Thank you, and good speaking to you early in the morning. Yes, I think the banks performed really well over the past year. I think it would be interesting to also just look at the context of the broader operating environment in which they achieved this. If we look at the environment that prevailed in 2023, we see firstly an economy that was really under pressure from a structural perspective. Think about the electricity supply and logistical constraints, and then also high levels of interest rates on the back of elevated inflation. So consumers and businesses were under pressure, particularly in the second half.

And then if you look at the broader context of where the banks operate in other territories, largely in countries across Africa, we’ve seen some economic growth faster than in South Africa, but we’ve also seen volatile currencies and debt-sustainability issues and elevated levels of sovereign risk. So I think if you look at the theme of our surveys, or what we called it in terms of solid foundation, challenging conditions, I think this has really been an exceptional performance by the banks in that context.

SIMON BROWN: You mentioned costs. One number that stood out to me, and to preface this I remember a conversation I had with Jaco Marais probably 13 years ago around cost to income, and he said with the new Basel rules and the like post the great financial crisis, he’s like [at] low 50 percents are probably off the table. But in a high-inflation environment, their cost-to-income’s down, averaging 52.2%. That to me was perhaps one of the standouts in a tough year and in an inflationary year.

FRANCOIS PRINSLOO: Definitely. I think if you look at the annual consumer inflation in December 2022 around 5.1% – and it was even higher for the rest of 2023, sort of at the upper levels of the Sarb’s target band of 3.26% – we’ve certainly seen strong cost management with, like you say, the combined cost-to-income ratio. Now the level is at its lowest level, as 52.2%. This ratio is clearly aiming in the right direction. As you’ve seen, many of the banks have commented previously on a target cost-to-income ratio around the 50% level. So in that context it’s been an exceptional performance.

If you do look at the cost in isolation, you’ll see that it has grown 12.3%. But keep in mind that revenues have also grown significantly. So if you look at the overall headline earnings up by 14% – which is exceptional – and in that looking at the sort of combined numbers, the banks returned an RoE of 17.6% compared to around 17.2% in the comparative year, which is enviable in any banking sector.

SIMON BROWN: Absolutely. And of course the tough part has been impairments. That is sort of at the upper end of through-the-cycle levels, 102 basis points – not unexpected. And truthfully, again, considering the inflation, considering the pressure on consumers, interest rates, they are managing it incredibly well.

FRANCOIS PRINSLOO: Definitely. If you bear in mind that the South African prime lending rate is at 11.75% on December 31, that’s 450 basis points higher compared to the start of 2022. So if you further look at the sort of three sectors – retail, corporate, and sovereign exposures – in the retail certainly higher interest rates drove up installments and dampened some affordability. So South African households felt the burden of this large debt repayment, less disposable income, and a higher debt-to-income ratio. And the consumer distress did increase the cost of risk, particularly around sort of home loans, vehicle and asset finance, as well as personal loan finance.

Interestingly we are seeing that coming through in the corporate investment banking side as well, as consumer-facing corporate sectors felt the knock-on effects of that.

I think the last point just around credit is probably around the sovereign risk. We’ve seen in certain African territories – in the likes of Ghana and Zambia and Malawi – increased sovereign risk with the result that credit risks increase across those portfolios.

But just standing back, deterioration from about 102 bips in the combined credit-loss ratio, which is the income statement impairment charge divided by the average advances, is at sort of at the top level of the through-the-cycle levels that the banks have indicated.

But it’s also important to look at the fact that in terms of the accounting standards that govern the measurement of credit provision, it is forward-looking in nature, so it does anticipate the stress in the models. So credit impairments are taken upfront. But overall, income statement has been impacted by credit.

SIMON BROWN: We’ll leave that there. That’s Francois Prinsloo, PwC Africa’s banking and capital markets leader. Francois, I always appreciate the early morning.

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