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AfricaMay 4 2010

Eyes on the prize

Summer in the city: The Soccer City stadium in Johannesburg, built for this June's World Cup. The tournament will provide a boost to South Africa's retail banking sectorRetail banking in South Africa has emerged relatively unscathed from the global recession. Bankers are now taking advantage of the upturn, the confidence generated by the forthcoming World Cup hosted in the country and the largely untapped potential presented by the under-banked and unbanked population. Writer Michael Imeson
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Eyes on the prize

Everyone's eyes will be focused on South Africa next month when the 2010 World Cup football tournament kicks off with the first match between the host nation and Mexico in Johannesburg's Soccer City stadium. It will provide a much-needed boost to the country's economy, tourism industry, consumer confidence and, consequently, the retail banking sector.

Although South Africa avoided the worst of the global economic and financial crisis, it went into recession last year along with most of the rest of the world, with gross domestic product contracting by 1.8%. The prognosis for this year is better - a 2% to 2.5% growth is the consensus - and retail bankers are already benefiting from the upturn.

The country's retail banking market is highly competitive and dominated by four large players - Standard Bank, Absa Bank, Nedbank and FirstRand Bank - which between them hold about 85% of South Africa's banking sector assets. Investec, the country's fifth largest bank, operates as a niche private banking franchise and accounts for a further 5% of banking assets.

With five banks owning 90% of assets, retail growth opportunities for others may seem limited. However, South Africa's large unbanked population represents a considerable retail growth opportunity and the country's banks are pursuing opportunities in other sub-Saharan countries.

Anthony Walker, senior director for financial institutions at Fitch Ratings in Johannesburg, says retail impairments and low retail asset quality will be one of the biggest headaches for the country's retail bankers over the coming 12 months.

"South Africa's economic environment remains challenging, with low levels of economic activity and increasing unemployment placing pressure on consumers," he says. "But following the recent release of South African banks' 2009 results, management in most banks indicated that the trend of rapid deterioration in retail non-performing loans appeared to be slowing."

The South African Reserve Bank cut the interest rate by 0.5% to 7% in March, providing further support to consumers. "The World Cup should provide a short-term stimulus into the local economy and will benefit industries related to tourism such as hotels and restaurants," says Mr Walker.

A sound banking industry

Peter Schlebusch, CEO for personal and business banking at Standard Bank, says retail bankers in South Africa face a number of challenges over the coming year, an obvious one being "the protracted consumer and economic recovery", he says. "Although South Africa has been somewhat less affected by the global economic crisis than other countries, we are not immune to the effects of increases in risk aversion - shown by the increasing risk spreads and external funding costs - and the slowdown in global demand for goods and services," he adds.

"Another important challenge is that of striking a balance between economic growth and financial regulation. The South African financial industry is a part of the global industry and we will play our part in moving the global financial system forward. The point is to recognise some specific South African conditions that exist, particularly our strong regulatory environment.

"For instance, the South African financial industry was rated sixth in terms of financial market sophistication and bank industry soundness according to a World Economic Forum report. This needs to be taken into account when future financial regulation is considered.

"A further challenge is the financial inclusion of the South African population, especially the very low income unbanked portion of the population. There is an important need to broaden the base of access as well as create sustainable financial services business models."

Bankers are always keen to point out that challenges also present opportunities. Mr Schlebusch is no different in this respect. He says the tough economic conditions provide every retail banker in the country with a chance to "really connect and refocus" their efforts on their existing customers, by delivering an "excellent, consistent customer experience".

Bright opportunity

The World Cup is a tangible and immediate opportunity. "We have already seen an increase in consumer confidence which, in part, relates to the excitement of hosting this competition," he says. "We have a specific action plan to capitalise on the opportunities it presents.

"We also see significant opportunities in extending financial services to the under- and unbanked population in South Africa. While we have made great strides with financial inclusion, we feel there is more work to do, particularly in offering customers holistic propositions that provide not just simple transactions but that also suit key customer needs such as affordability, accessibility, asset protection and asset accumulation."

Standard Bank's overall profit for 2009 fell 17% compared with 2008, and the personal and business banking unit's profit fell by 19%. There were three main reasons for this poorer performance, although its peers suffered greater declines in profitability.

The first cause was credit impairments, which were "persistently high for our long-term asset-based portfolios," says Mr Schlebusch. "This is not surprising, given the high levels of stress experienced by customers, with employment dropping and inflation (particularly in food, fuel and services sectors) rising significantly, leading to a drop in real incomes.

"The second reason is the rapidly decreasing interest rate environment [the endowment effect] and increasing funding costs, whose effects were felt around the world. This negatively impacted margins. Finally, the lower domestic demand for goods and services played out in lower levels of customer transaction activity and lower credit demand from customers."

Mr Schlebusch is optimistic about 2010 and sees encouraging signs. Some of his bank's short-term lending portfolios are picking up and transaction volumes are improving. Impairments have stabilised and will start to reduce over time. He says the country is going through a multi-speed recovery and although economic conditions are improving, some customers are more positively affected than others.

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Conscious of challenges: Peter Schlebusch, CEO for personal and business banking at Standard Bank

Banking association

Cas Coovadia, managing director of the Banking Association of South Africa (BASA), agrees that the impact of the economic downturn is still causing problems for the country's retail banking sector. It is relatively difficult for banks to borrow in the wholesale markets, and individual borrowers are over-indebted and deleveraging. "There has been an impact on profitability as a result, although banks have remained profitable throughout," he says. Furthermore, the country's banks are now having to deal with the international regulatory response to the crisis, even though they were not as badly affected as those in other countries.

Looking on the bright side, banks have a lot to gain from the government's infrastructure programme and the potential public-private partnerships that will need to be financed, says Mr Coovadia. "The potential influx of tourists during the World Cup and the resulting increase in foreign exchange transactions and utilisation of cards will also be a big benefit.

"There is increasing confidence in the African economy and there are many opportunities for local banks to benefit from this. The constructive implementation of broad-based black economic empowerment, where the government works with banks to provide sustainable access to finance to a broader spectrum of people, is another opportunity," he says.

Retail banking in South Africa is advanced, both compared with the rest of Africa and the world's most developed nations. "South African banks are competitive and have demonstrated innovation in products for developing markets," he says. "We are also very advanced in electronic banking." A striking example of innovation is the Mzansi account for low-income people wanting to enter the banking system. About 5 million accounts have been opened in the past four years.

Teba goes prospecting

One of the most interesting banks outside the big league is Teba Bank, a mutual organisation owned by its depositors and the only black-owned bank in the country. Its customers are the mining communities, especially gold and platinum miners.

However, last year the bank, which has its headquarters in Johannesburg, changed its strategy and decided to broaden its customer base by providing affordable financial services to other workers' groups throughout South Africa. It is the country's 10th biggest bank in terms of assets and has the eighth most-recognised banking brand according to a Markinor/Sunday Times top brands survey.

Leonardene Classen, general manager for business change at Teba Bank, says the new strategy is "to become a bank for all and the workers' bank of choice". It is developing new products and services to serve this larger target market and ensure that customers' needs are met. Its physical distribution network is made up of branches, ATMs and agencies, and more branches are being opened. "A benefit of the recession for us is that we have been able to acquire premises much more cheaply than we could have done otherwise," says Ms Classen.

The bank is strong on corporate responsibility. "Education is the key focus in our community investment initiatives," says Ms Classen. "Last year, we launched the Teba Bank Bursary Programme targeted at mine-workers' children in need of funds to study at tertiary institutions." The bank commissions regular surveys of its customers and target markets and the latest shows that customers' perceptions of Teba Bank are high, with good scores for statements such as 'treats me with respect', 'treats all races equally' and 'is affordable'.

Charting a safe and profitable course in South Africa's retail banking market in the months ahead will not be without its difficulties. But with economic recovery, the World Cup and major advances being made in financial inclusion by banks such as Standard and Teba, substantial rewards lie ahead for the most customer-centric, innovative and motivated institutions.

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