South Africa banking: start-up shake-up
A slew of new banks and tech-based financial services are shaking up the industry in South Africa. New competitors to the so-called ‘big four’ – Standard Bank, Absa Bank, Nedbank and First National Bank – range from the state-owned Postbank to insurance group Discovery, TymeDigital (a venture by the Commonwealth Bank of Australia and Patrice Motsepe’s African Rainbow Capital) and former FNB chief executive Michael Jordaan’s Bank Zero. These are joined by retailers (mobile money from Shoprite Money) and agricultural groups (Afgri, which bought Bank of Athens’ South African operations).
Many of those firms would like to grow like Capitec. It gave South Africa’s well-entrenched major banks a wake-up call by disrupting their long-held oligopoly as a leaner, meaner and faster-growing operation. But it took Capitec, which was launched in 2001, some years to become a major force in the industry.
A recent PwC report says the South African financial services industry is increasingly ‘a marketplace without boundaries’, where banks are being challenged ‘by digital solutions with lower-cost models’. It adds that the market share of the incumbents will likely be squeezed by innovative new entrants unless banks implement strategies ‘to remain relevant in the future banking market landscape’. FNB has moved successfully to a more digital banking model, while other large banks are trying to follow suit.
The new financial services models are not centred around becoming one of ‘big four’, whose services range from retail banking to commercial and investment banking with a plethora of additional services, from mortgage lending to large-scale merger and acquisition capability. Wessel Badenhorst, an analyst in the financial services sector at 36ONE Asset Management, tells The Africa Report that it is important to keep in mind that most of the challenger banks offer limited product suites: “Most do not offer business banking or offer limited retail products, sometimes because regulatory hurdles prevent them from competing in these markets. TymeDigital, for example, offers only transactional banking, and comments from [insurer] Discovery suggest its bank will have limited lending products, at least initially.”
So far, the big banks continue to brush off the threats and have weathered some difficult years. PwC’s analysis indicates that they grew earnings 5.2% in 2017, although core earnings – operating income minus operating expenses – improved by only 3.6%. Earnings were helped by a 10.6% decline in the second half of the year in bad-debt charges.
Credit growth remained muted ‘given elevated levels of political and economic uncertainty, low GDP growth and subdued levels of household and business confidence,’ PwC says. In addition, retail asset-led businesses including instalment sales and vehicle finance showed strain, while corporate credit demand declined.
The Reserve Bank said that total banking sector assets increased 5.7% year-on-year to more than R5tn ($378.8bn) at the end of 2017. The central bank added that the 12-month moving average operating profit growth rate decreased throughout 2017, mainly due to a decline in the growth of net interest income and an increase in operating expenses.
36ONE financial services analyst Tumi Loate says South African bank earnings have been “remarkably resilient” over the past few years, considering economic conditions. This is largely due to good cost control and mild credit losses. “However, given how low credit losses are currently, we have unfortunately reached a point where the most likely trajectory for credit losses points upwards,” she says.
Some of the banks are reacting to the pressure on their core lending and transactional businesses by expanding into other financial services, such as insurance and asset management, Loate says: “This could potentially provide some growth going forward, but new ventures tend to take time to mature.”
Since the end of 2017, there have been major organisational changes at two of the big four banks. With the sell-down of Barclays’ stake in Absa’s holding company, Barclays Africa Group, the holding company changed its name back to Absa. And with the restructuring of Old Mutual Group, which will see Old Mutual reduce its 54% stake in Nedbank to less than 20%, Nedbank is increasingly independent. Neither of these events will significantly change the way Absa or Nedbank operate. The analyst Badenhorst adds that these changes “are more reflective of desires of the foreign holding companies to exit South Africa, rather than local companies deciding to refocus on the local market.”
Operations in the rest of Africa offer growth for some of the players, but generally earnings growth in the medium term is dependent on cost savings, says Mergence Investment Managers’ head of listed investments, Bradley Preston. Many South African businesses are coming home “with a few black eyes and bruised egos,” he says, but there has also been a specific regulatory drive behind this, with global banking regulations making it harder to own minority stakes in banks in other jurisdictions.
Some banks continue to allocate capital outside of South Africa. They include FNB’s parent company FirstRand Banking Group, which bought Britain’s Aldermore Bank this year, and Standard Bank Group, which intends to put more capital into its Britain-focused joint venture with the Industrial and Commercial Bank of China.
There is still nervousness among investors in South Africa, spurred by the downfall of some major companies, including Steinhoff. Mergence’s Preston says that the 2018 collapse of the small VBS Mutual Bank has been damaging because “the quality of risk management and oversight from the South African banks in their relationship with corporate South Africa has been called into question.”
For banks, President Cyril Ramaphosa’s announcement of land expropriation without compensation is another potential challenge. “How land expropriation is executed is obviously important to the banks as lenders against property and lenders in the agricultural sector,” Preston concludes.
This article first appeared in the September 2018 print edition of The Africa Report magazine