South African Banking sector at lowest point since Global Financial Crisis

19 March 2018 4 min. read

The slump in South Africa’s GDP has affected most sectors of the country’s economy, but perhaps none more so than the banking sector. A new report from global professional services firm EY reveals that banking revenues in South Africa are currently growing at their slowest rate since the Global Financial Crisis. 

South Africa had a challenging 2017. Oil and commodity prices plummeted in 2014 and 2015, which sent all sectors into economic turmoil, particularly those which are commodity-dependent. Any signs of recovery that emerged in 2016 were subsequently wiped out after another poor year in 2017.

A new report from Big Four accounting and advisory firm EY has revealed that the financial sector has not escaped unscathed from the situation. Banks in South Africa are not only dealing with the specific issues that are plaguing the South African economy, but are also tackling global challenges of digital disruption and other regulatory restrictions that are expected imminently.

The country’s banking sector is dominated by four major banking institutions, namely Standard Bank, Barclays South Africa, Nedbank, and FirstRand. In order to cope with the regulatory and technological disruption, these banks were relying on the consulting industry to help with business transformation and IT architecture.

One firm that was particularly involved with the sector was US-based management consultancy McKinsey & Company. However, after being embroiled in a political scandal in South Africa, the firm’s services were dropped by Standard Bank and Barclays, following which Nedbank also announced a termination of services; not only denting McKinsey’s revenues in the country but causing a major setback to the banks’ transformational efforts.

Bank headline earnings versus GDP growth

EY reveals that the banking sector had a frustrating year last year, having registered a relatively good performance in the first half of the year, but pointing back downwards by the second half. GDP growth in South Africa stood at 1.3% last year, which represents an increase from 0.5% in 2016, but a major dip from 2012 and 2013 levels of 2.5% and 1.8% respectively.

Growth in headline earnings for the banking sector, however, fell by 0.9% from 6.6% in 2016 to 5.7% in 2017. These levels are extremely low when compared to the 2014 and 2015 levels of more than 16%, and represent the lowest rate of growth for the country’s banks since the Global Financial Crisis in 2009.

The decline was brought about by a wide range of factors, some of which are detailed in the report. Overall, lending fell across the board, in correspondence with earnings, which remained stagnant. Similarly, advances grew at a higher rate than deposits, which prompted banks to push up interest rates to ensure revenues.

Costs in the economy grew at a higher rate than income, and Return on Equity (ROE) declined in accordance. However, the report notes that the ROE in South Africa is at a relatively strong level by emerging market standards.

Commenting on the findings, Ernest van Rooyen, Partner at EY Africa’s Financial Services division said, “As with the previous year, 2017 proved to be challenging for banks, resulting in the weakest earnings growth the sector has seen in five years. This is in line with tepid interest and revenue growth, although support from stronger margins and improved impairment charges helped offset some of the impact. We observed higher efficiency ratio largely as a result of weaker income growth.”