Though South Africa's economy is cooling, its banks are continuing to perform strongly. For some, growth is coming from operations elsewhere in Africa, while for others its is stemming from the domestic market. James King looks at the strategies being employed to keep the country's lenders buoyant in a slow-growth environment.

Though South Africa’s economic growth has cooled in recent years, the country’s banks are showing little sign of strain. Based on their performance over the past 12 months, most lenders have enjoyed a period of robust growth, as increases in total assets have gone hand in hand with an uptick in profitability.  

To be sure, there appears to be difficult times ahead and opportunities for further growth are expected to diminish in the coming months. In particular, credit risks are likely to increase as the impact of elevated interest rates and high household debt, among other factors, begin to bite. But as far as banking sectors go, South Africa’s is both well regulated and competitive, meaning that capitalisation and liquidity levels are healthy and that most banks are in a good position to weather a more challenging environment.

Strong position 

“South Africa has a healthy and well-regulated banking sector. We haven’t had any structurally significant bank stability issues in recent years,” says Cas Coovadia, managing director of the Banking Association South Africa. 

Underpinning this strong performance has been a commitment to cost management, information and technology upgrades, service and product innovation and in some cases regional expansion. Cumulatively, these developments have left South Africa’s larger lenders, in particular, leaner, more flexible and in a better position to profit from opportunities in the domestic market as well as their regional operations. 

Encouragingly, data from the country's central bank shows that this growth continued in the early months of 2016. By February of this year, the total assets of South African banks had increased by 14.5% on an annualised basis. More significantly, these assets had been put to good use as the sector’s return on assets figure increased from 1.07% to 1.14% over the same period. Meanwhile, banks’ return on equity (RoE) climbed from 14.65% to 16.22%.

Standard Bank soars 

South Africa’s largest lender, Standard Bank, saw its headline earnings increase by 27% in 2015 even as the domestic economy endured a number of severe challenges in the second half of the year. This performance was accompanied by increases to the lender’s Tier 1 capital ratio, which grew from 12.9% to 13.3%, as well as a jump in RoE to 15.3% from 12.9%. 

A notable contributor to the success of some South African lenders, including Standard Bank, is their exposure to regional markets across the African continent. By diversifying geographic risk, some South African banks have mitigated the effects of a cooling home market. “Our corporate and investment banking [CIB] clients that are making investments across the continent have performed particularly well. As a result, our CIB growth for the rest of Africa has been strong,” says Sim Tshabalala, chief executive of Standard Bank. 

Indeed, Standard Bank’s CIB unit achieved a headline-earning increase of 10% for 2015 despite a strong performance in 2014. Parallel dynamics underpinned the lender’s success with commercial clients, who fall under its personal and business banking unit, where business lending was up 18% in 2015. “It is a similar story for many of our larger commercial clients. Those with growth prospects both inside South Africa and the wider region have been the standout performers,” says Mr Tshabalala. 

This regional success has come as Standard Bank is slimming down its presence beyond Africa, as part of a wider initiative to cut costs. This has seen the bank downsize in a number of non-African markets. “We completed the sale of a 60% stake in our London-based global markets business to the Industrial and Commercial Bank of China [in 2015]. This transaction forms part of a wider agenda to narrow and focus our presence outside of Africa,” says Mr Tshabalala.

Nedbank's outward appeal 

Other lenders have also gained from their exposure beyond South Africa. Nedbank, the country’s fourth largest lender by Tier 1 capital, is reaping the benefits of its 20% stake in Ecobank Transnational Inc (ETI), acquired at the end of 2014. “We continue to benefit from our activities outside of South Africa. We saw growth in that collective portfolio primarily as a result of our investment in ETI. We now have 74 of our corporate customers using ETI for transactional banking services in central and west Africa,” says Mike Brown, chief executive of Nedbank. 

Nedbank’s headline earnings from the rest of Africa for 2015 were up by 93.6% to R691m ($47.35m), from a figure of R357m in 2014. The bank’s approach to the rest of the continent – whereby it pursues an own-and-operate model in the Southern African Development Community states and east Africa, and a partnership format with ETI in central and west Africa – still appears to have plenty of growth potential. Nedbank’s operations in the rest of Africa contributed to just 6% of the bank’s headline earnings, while non-South African assets stood at 4% of the total. 


This year, Nedbank is expected to increase its share in Mozambican lender Banco Único, the country’s sixth largest full service bank, to 50% at a cost of R178.4m. The deal will see Nedbank gain exposure to one of southern Africa’s most promising economies and will cater to the growing number of South African corporates doing business in and with their north-eastern neighbour. But Mozambique, in common with a number of its regional peers, has faced a more challenging economic environment in recent times. 

With commodity prices remaining depressed, the sub-Saharan Africa region has been characterised by a high degree of economic volatility, despite its positive aggregate growth picture. Some markets are likely to suffer further in the coming months meaning that, for South African banks, their exposure to these jurisdictions may also take a hit down the line. Standard Bank’s Nigerian unit, Stanbic IBTC, was a notable drag on the group’s wider performance as it registered a decline in headline earnings in 2015, along with Ghana and Tanzania. 

“The performance of some lenders has been supported by their operations across the continent. Looking ahead, this contribution may begin to diminish as regional economies feel the impact of cooling commodity prices,” says Mr Coovadia.

Capitec's domestic strength 

Nevertheless, South Africa’s banks have still posted strong gains from a subdued growth environment in their home market. Capitec Bank, a retail lender and South Africa’s sixth largest bank by both total assets and Tier 1 capital, posted a 26% gain in net profit in the year to February 2016. This was accompanied by the addition of more than 1 million new clients, while the bank’s total assets grew from R53.9bn to R62.9bn over the period. 

Andre Du Plessis, the bank’s chief financial officer, puts this success down to Capitec’s strategy, as well as its unique value proposition, in the local market. “To deposit your salary or savings in a bank there must be some recognition of the value proposal. Our model does not discriminate based on income and we think it’s fair that everybody gets a decent return on their deposits,” he says. 

“From a transaction point of view, Capitec performed well due to our growing share of high-income clients. During the 2016 financial year, the number of customers earning R180,000 or above increased by 44%,” adds Mr Du Plessis. 

Even as the South African economy falters and pressure on lower income earners in particular gathers pace, price competition in the retail banking space is expected to intensify.  “If the economy starts to bite people will shop around. If we offer banking solutions at a lower cost than our competitors, then I think we can gain market share. We estimate our transaction offering to be at least 30% less expensive than the competition,” says Mr Du Plessis.

Renewable energy boost 

Beyond the consumer banking market, a number of South African banks have benefited from the government’s highly successful renewable energy independent power producer procurement programme (REIPPP). This has seen a large number of bankable renewable energy projects hit the market, offering lending and advisory opportunities for the wider banking sector. 

“In recent years there has been a renewable energy boom in South Africa as a result of the highly successful REIPPP programme. The opportunities have been immense and Rand Merchant Bank has played a key role in this sector,” says Daniel Zinman of Rand Merchant Bank’s infrastructure finance team. 

The depth of the project pipeline linked to REIPPP means that most lenders still have a considerable funding backlog underpinning their wholesale financing divisions. “Nedbank has been a key participant in South Africa’s renewable energy programme. Our clients have about a 30% market share in the projects announced to date and for us that means about a R35bn lending pipeline, of which we have paid out R11bn,” says Mr Brown. 

Indeed, the contributions of infrastructure spending are likely to see growth in South Africa's wholesale banking outstrip the performance of retail banking for the remainder of the year, according to Mr Brown. Plans to procure 2500 megawatts of electricity from coal-fired plants through an independent power producer programme, which caps individual bids at 600 megawatts, are particularly promising. 

“There are some really exciting things happening in South Africa. In particular, the bidding for the coal baseload independent power producer procurement programme presents commercial banks with a huge opportunity,” says Mr Zinman.

Turbulent environment 

While there is little doubt that South Africa’s banking system is in good shape, it is clear that the challenges facing the country’s lenders are expected to grow in 2016. Lower commodity prices, slower economic growth, increasing interest rates and higher levels of household debt are all likely to heighten credit risks in the banking market, according to rating agency Moody’s. 

Beyond these concerns, the threat of a sovereign downgrade, which may occur as early as June, is a growing concern. “Even if you run your business well and have the right principles in place, there’s nothing you can do about a sovereign downgrade,” says Mr Du Plessis. 

South Africa’s banks have a relatively high exposure to the sovereign in the form of debt securities. Research from Moody’s points to the fact that the country’s top five lenders have an overall sovereign exposure, which includes loans to state-owned enterprises, equivalent to 144% of their capital bases. Meanwhile, as key sectors of the economy, including the extractive industries, begin to feel the impact of a cooling economy, pressure on banks’ loan books is expected to grow. 

“On the retail side, I think we’ll see a cyclical increase in bad debts from very low current levels as interest rates rise, though this won’t be significant. I am a lot more concerned about the risk from wholesale books, particularly for mining, oil and gas, agriculture and construction,” says Mr Brown. 

These conditions have caused most lenders to adopt a more cautious approach to lending as the prospect of growing non-performing loans (NPLs) seems more likely. “South Africa is going to grow by less than 1% this year and that will put pressure on banks’ revenues, while a number of lenders can also expect to see an increase in NPLs,” says Mr Tshabalala. 

While it is clear that South Africa’s banking sector is braced for a more difficult operating environment, the prudent management culture that exists among the country’s top lenders has ensured that most have built up comfortable capital and liquidity positions. Additionally, increased portfolio provisions and the implementation of more cautious credit application reviews are likely to mitigate the worst effects of a cooling domestic economy. 

Accordingly, while most banks are mindful of the risks, there is a strong sense that growth opportunities are still there for the taking. “Looking ahead, we still expect to perform within our 15% to 18% RoE target. But overall we think that we’ll improve on our performance from last year,” says Mr Tshabalala. 


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