What is the state of banking in SA? An in-depth analysis

South Africa's big four banks have all released their interim results for the year. The groups posted combined headline earnings of R27.8bn, up 13.1% from the comparable period last year, as well as a 9.5% increase in total operating income. To get insights into PwC's latest report, South Africa Major Banks Analysis: Stability amid uncertainty, Alec Hogg spoke to PwC's Johannes Grosskopf. Is FNB leading the pack, and skewing the numbers favourably, is banking as healthy or unhealthy as it is purported to be? Alec gets all of the in-depth insights from Johannes, and separates the wheat from the chaff in this interview that highlights the barometer of any economy, its banking sector. – LF 

GUGULETHU MFUPHI: South Africa's four major banks have all reported results with FirstRand taking the lead as banks struggle to boost lending while consumers are under pressure. Johannes Grosskopf, Banking and Capital Market's Leader for PwC Africa, joins us now for more insight. Good to have you with us Johannes, just picking up on Alec's comments, during the break that no doubt if you take out FirstRand from the overall analysis it is not too much of a pretty picture.

JOHANNES GROSSKOPF: Yes, I think one need to look at the overall results as well and I didn't do an analysis of taking FirstRand out but I think there has still been growth. I think banks have grown their non-interest income. They've grown their net-interest income and, for me, admirably is the net-interest income. Yes, we've had some increases in rates, which has an endowment effect but banks have continually, over the last, and we've now tracked this for nine consecutive six-month periods. That for nine consecutive six-month periods, all the banks have increased their net-interest income.

ALEC HOGG: But I looked at your numbers. I don't understand this. I went through that report of yours and it shows that net-interest income was up four-percent, in this period, so you take FirstRand out you're in trouble, but non-interest income, in fact was down by R1bn to R57bn or R58bn, so they've gone the other way. Again, you take FirstRand out and it isn't a pretty picture, I'm not sure where you get the growth from.

JOHANNES GROSSKOPF: I think irrespective of FirstRand, net-interest income, all the banks have grown net-interest income, so that is a fact. If we look at non-interest income, I think what we are saying in our report is that banks have kept their fees stable. That has had an impact on their results. We've seen growth in Africa and that's had a big positive impact on bank's results. Particularly on the banks with big franchises there, that's been able to capture the trade flows between Africa and Asia.

ALEC HOGG: So if you take Africa out… let's leave FirstRand in and take Africa out, what does it look like then?

JOHANNES GROSSKOPF: I think that's a difficult question…

ALEC HOGG: Yes, do you not separate South Africa and Africa?

JOHANNES GROSSKOPF: Banks don't give us that granular information. That information is not available. I think if you look at South Africa Inc. or SA Inc. SA Inc. has got its problems and we highlight that in the report. We've had labour unrest. We've had now, renewed worries about infrastructure and electricity. We've had two political issues offshore that influences us. We've had China's growth that's not that positive, so all of those weigh down on South Africa and South Africa Inc. and banks have said and warned when they look ahead, what that impact is going to be on their results going forward.

ALEC HOGG: But the problem with all of this is that we know that banks reflect what's happening in an economy. You've taken what the banks are doing overall, outside of South Africa as well as inside of South Africa. You've taken the 'star performer', which is just so far ahead of the others it's getting a little embarrassing now, with FirstRand and the rest, and you've said, "Actually, things are fine." If you take out those variables then things aren't that fine. In fact, maybe we need to be looking at the underlying causes rather than saying 'oh, it's okay, business as usual'.

JOHANNES GROSSKOPF: Yes, what we highlight there as well is that non-performing loans have started to creep up, so that is something that banks are now thinking about. We've seen interest rates hikes and that is coming through in non-performing loans that's slightly against the trend we've seen for the last number of years, that is an area where banks are concerned, and all of them are including, and you mentioned FirstRand. FirstRand warned against that and the cycle that's turned. We've seen card debtors and instalment finance, where impairment levels have increased quite, I don't want to say dramatically, but by far ahead of the rest of their portfolios, and banks are focusing on those, specifically. That is where you see the consumer being hurt first, so card debtors, people spending on their credit cards that is now trending upwards. Car finance and leasing, that's trending upwards as well so those are two big worries for all of the banks.

GUGULETHU MFUPHI: Hypothetically speaking, if Alec was Moody's, having read through these numbers, would he still maintain his downgrade on the rest of the banks?

JOHANNES GROSSKOPF: I think Moody's downgrade is not linked to one bank specifically. The Moody's downgrade was what happened in the economy, would they link it to South Africa? They linked it to African Bank being placed under curatorship, so all of those factors, and combined, they downgraded the banks, they are also cautious. There was a strong rebuttal from the Reserve Bank against that downgrade but the Moody's and all the rating agencies are independent and they've got to come up with their view.

ALEC HOGG: It was interesting to see your operating expenses were down, year-on-year, which is an interesting trend. How do we compare? How does South African banking operating expenses compare with the best in the world?

JOHANNES GROSSKOPF: We did an analysis of efficiency ratios, so cost and income ratio, a couple of years ago, and the only one where we were outlying against were, if we look at the BRICS countries, were China. China is just way more efficient than our banks but there you've got different forces at play. They are mono-line banks, very retail focused, big volume, where our banks are a lot broader, in a sense, and our banks compared very well against their peers in the big countries, and a lot of the banks in Europe.

ALEC HOGG: But who wants to compare with Russia, India, and China? You want to compare with Kenya, where there's 35/40 percent cost-to-income ratios.

JOHANNES GROSSKOPF: We are doing very well.

ALEC HOGG: The UK banks, the US banks, isn't that where we're looking at. Our cost to income ratios are a little bit dodgy here.

JOHANNES GROSSKOPF: Yes, we are but we're not far ahead of those banks and you can look at some of the investment banks in Europe, where the cost to income ratio was a lot higher.

ALEC HOGG: Yes, but my point is we are sitting in South Africa with a first world economy, and many of these banks are focused on the first world. Surely, you should not be relating them or comparing them with other first world economies, rather than…

JOHANNES GROSSKOPF: Are we in first world or are we part of BRICS?

ALEC HOGG: Have a look at the World Economic Forum Competitiveness Report, and you can see where we are part of, where we are 'third world', we come right at the bottom, like education, and labour relations, etcetera. Where we are first world and we actually, do have a couple of first place finishes, like the JSE, like Auditing Standards, what you guys do, so there is a difference in this economy and, clearly where the focus of these big four banks is, still very much is in the third world side as Abil.

JOHANNES GROSSKOPF: I think if you compare us. I can give you the figures afterwards; we are not doing that badly, Alec, so I don't think your comparison to…

ALEC HOGG: I'm asking. I'm not saying but I'm asking.

JOHANNES GROSSKOPF: I think we are doing very well. I can't remember the analysis we did. We didn't do it because the information is not just readably available, so we don't do it every six-month, but when we did it, we compared very well.

ALEC HOGG: So, generally speaking, you say the banks that are in South Africa are doing pretty fine, despite all the troubles that are elsewhere, but there are reasons for some concern.

JOHANNES GROSSKOPF: Yes, I think they have reason for concern and their funding costs. The funding costs are going up because of the downgrade, because of worries about South Africa, so that is a worry. I think the rate cycle where we're in; generally, banks are worried about impairments if the rates-cycle goes up.

ALEC HOGG: Johannes Grosskopf is from PwC and he's the Banking and Capital Markets Leader for PwC Africa.