Can today’s operational

challenges create tomorrow’s

opportunities?
A review of South Africa’s banking sector
financials 2017

13 March 2018

Analysis of South Africa’s six largest banks, based on 12

month data as at financial year-end
A sombre but improving economic outlook
South Africa’s growth recovered in 2H17, but remains weak

The IMF has revised South Africa’s GDP

Weak and declining GDP growth
growth forecast downwards
The IMF continues to lower its growth forecast
Political leadership changes
▶

for SA.
Weak credit growth and consumer ▶ It believes that growth will average 0.9% p.a.
confidence over the next two years.
Low investment levels driven by weak ▶ However, others are more optimistic, one
business confidence forecast even sees growth at 2.3% in 2018.

Drought and water crisis ▶ SSA will grow somewhat stronger than
previously thought, at 3.8% in 2018.

3.1
2.8 3.1
GDP
5.7 GDP
1.9 2

3.5
3.4 3.1
2.5 0.5 0.4
1.8 0.4
1.5 -0.3 -0.6
1.1 1.3
0.3 0.8
1Q15

2Q15

2Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

-1.8 -1.5
-1.5

Source: StatsSA Source: StatsSA, IMF

Page 2 South Africa Banking Results 2017

South Africa Macroeconomic overview
The fiscal deficit remains 2018 IMF, World Bank growth forecasts
GDP growth gradually recovers above recommended norms
(%) at 0.9% and 1.3% respectively

2016 2017 2018 2019

Inflation remains within
2.1 its 3-6% target
1.3 1.7
0.6
6.3
5.4 5.1 5.2
2016 2017 2018 2019 -3.3 -4.2 -3.8
3.8 -3.7
The Rand is appreciating, along with other Forex reserves are gradually
EM currencies (change US$ 2017) rising (US$ bn)
11.6 50.3 2016 2017 2018f 2019f
49.1
48.2
5.8 5.5
4.7 47.0
3.1
Impact of
Corporate governance
S Africa India Mexico Brazil Russia 2015 2016 2017 Current BEE codes
New political leadership
What to watch Commodity price moves
Policy formulation
Rising fiscal gap Budget squeeze
2019 election cycle
Change in President, signaling business friendly shift Weak but improving consumer
Water crisis – especially in Cape Town & business sentiment

Page 3
Low GDP growth has driven slower bank profits growth
SA’s bank earnings growth in 2017 was the lowest since the GFC

Longer term each 1% rise in GDP sees a 5% rise in bank HE

28.5

HE growth 19.5
16.4 16.5
GDP 10.4 11
5.7 9.5
4.8 3.5 6.6
3.4 3.1 2.5 1.8 1.5 1.1 5.7
-1.5 0.5
1.3
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017
-21

Source: StatsSA, EY Analysis

Page 4 South Africa Banking Results 2017

Low GDP growth has slowed credit growth
Credit growth has slipped from pre GFC double digit territory

Private Sector credit extension

12

10

Source: SARB

Page 5 South Africa Banking Results 2017

South Africa banking review 2013 - 2017

2013 2014 2015 2016 2017 CAGR

Total Advances % growth +7.3 +9.1 +8.9 +4.1 +5.8 7.5

Total Assets % growth +11.7 +8.0 +9.3 +0.8 +4.4 7.4

Total Revenue % growth +6.7 +14.9 +8.8 +9.0 +5.4 9.8

Headline Earnings % growth +9.8 +13.6 +16.5 +6.6 +5.7 10.1

Efficiency ratio bps change -3.0 -90 -40 0 +120 -8pa

Interest margin bps change +25 -30 +80 +12 +11 +22pa

ROE bps change +130 +400 +70 -170 -35 +60pa

lowest

highest

2017 Another challenging year, characterised by

• Weakest credit and headline earnings
growth in 10 years
• Tepid interest and revenue growth
• But there was support from stronger
margins and contained impairments
• Increasing efficiency ratios due to weak
top-line growth
• Slower returns (measured by ROE), but
offset by lower cost of equity
• Very weak retail consumer and corporate
confidence
• Rest of Africa also faced challenges,
providing little uplift

Page 6 South Africa Banking Results 2017

SA Banks Inc. Balance sheet highlights
Advances are growing well ahead of deposits

6 largest banks 2017 2016 % change • Corporate and Investment bank lending
growth is the strongest.
Total Deposits Rbn 4 040 3 925 +2.9
Total Advances Rbn 3 679 3 476 +5.8 • African lending remains weak for a 2nd
consecutive year – despite stronger
CIB 1 315 1 235 +6.4
economic prospects in the 2nd half.
Mortgages 1 030 1 015 +1.5
• Asset finance reflects a weak economy and
Vehicle Finance 465 463 +0.10
falling vehicle sales.
Business 362 352 +2.9
Card 106 103 +2.7
Africa 295 309 -4.6 = industry average
lowest % change: Top 6 banks highest

-4.3 2.9 27 Total deposits

0.5 5.8 9.6 Total advances

-10 -5 0 5 10 15 20 25 30

Page 7 South Africa Banking Results 2017

SA Banks Inc. Income statement highlights
Interest income remains strong despite slow advances growth

6 largest banks Rbn 2017 2016 % change • Strong pressure remains on fee income.

Headline Earnings 83 78.5 5.7 • All banks recorded positive growth (albeit
mostly marginally so) in NIR.
Net interest income 156 145 7.6
Non interest revenue 145 140 3.6 • Two banks recorded double digit NII growth.
Impairment charge 32.5 35.8 -8.8
• Both revenue and headline earnings are in
Total revenue 293 280 4.7
line with or exceed inflation.

% change: Top 6 banks = industry average

lowest highest

-11.1 5.7 18.8 Headline earnings

2.2 7.6 13.3 Net interest income

0.2 3.6 14.9 Non interest revenue

3.7 4.7 13.7 Total revenue

-15 -10 -5 0 5 10 15 20 25

Page 8 South Africa Banking Results 2017

SA Banks Inc. selected ratio analysis
Earnings were driven by stronger margins, contained costs and stable
impairments
bps • Interest margins are rising despite the
2017 2016 change weak sentiment as banks focus on risk
based pricing.
Impairment ratio (5
banks) 0.68 0.75 -7 • Impairment ratio was once again lower
Interest margin (4 banks) 4.22 4.11 +11 despite a weak economy and expectations
Efficiency ratio (5 banks) 56.0 54.4 +160 of a rising impairment cycle.

• Mild revenue growth has contributed to

higher efficiencies ratios for most banks.

= industry average
lowest basis points change: Top 5 banks highest

-21 -7 70 impairment ratio

-2 11 30 interest margin

60 160 170 efficiency ratio

-50 0 50 100 150 200 250

Page 9 South Africa Banking Results 2017

 SA Banks Inc. selected ratio analysis (contd)
Returns continue declining, driven by rising capital levels
5 largest banks
• ROE’s are declining, but remain strong –
2017 2016 bps change even by Emerging Market standards.
T1 capital adequacy ratio 13.4 12.9 +50
COE 14.0 14.4 -40 • ROE remains above its five year average.
ROE 17.7 18.1 -35
• In addition, there was an increase in the core
ROE capital adequacy ratio in 2016.
2013 2014 2015 2016 2017
• The lower COE shouldered some of the

18.1

17.7
impact of lower returns.
17.8

18.5

• Three banks reported lower Tier 1 CAR.

5 year average = 15.3%
12.9

= industry average

basis points change: Top 5 banks

highest
lowest
-50 0 140 T1 CAR
-100 -40 0 COE

-180 -35 180 ROE

-200 -150 -100 -50 0 50 100 150 200

Page 10 South Africa Banking Results 2017

 SA Banks Inc. segment and product split
CIB advances growth outpace RBB but RBB earnings growth exceeds CIB

2017 Headline earnings 2016 Headline earnings

ZARbn ZARbn
Wealth Wealth
Africa
6.1 Africa 6.6
8.9 RBB
8.9 RBB
27.2 • RBB and CIB remains neck on
30.3
Business Business neck for position for largest
11.9 11.7 earning contributor.

• Wealth’s total earnings fell for a

CIB CIB second consecutive year due to
28.1 25.7 unfavourable capital markets.

• Although Africa’s earnings were

Earnings by product % change flat, individual banks had varying
experiences.
CIB 28.1 +9.3
25.7
• CIB earnings growth was lower
Business
11.9 +2.1 than RBBs despite stronger
11.7
advances growth due to the
Transactional banking
11.3 +7.6 more competitive, lower margin
10.9 2017
nature of CIB.
Mortgages 7.3 2016
+3.3
6.8

Instalment Finance 6.5

6.0 +9.1

Card 5.2
4.9
+4.9

Page 11 South Africa Banking Results 2017

 Impairments remain benign, despite the weak economy

• The impairment ratio

The credit loss ratio remains well below long-term levels continued to trend down
5 banks despite expectations of a
0.98 weak economy pushing
0.91 the ratio upwards.
0.81
5 year average = 0.8x

0.76 0.75
0.68

2012 2013 2014 2015 2016 2017

• Unsecured lending
5.8 impairments remain the
highest.
4.15
• For the rest, impairments
remain within a
6.1 2.6
manageable range.
4.5
1.23 1.25
2.6 0.59 0.35
0.25
1.3 1.3 0.61 0.36 0.31

Personal Card Africa Asset Retail Business CIB Mortages

loans Finance

Page 12 South Africa Banking Results 2017

Operating expenditure is in line with revenue growth
The major pressure stems from IT and associated costs

• Staff costs remain well

Operating Expenses Rbn 2017 2016 2015 contained in line with
Total 180.3 171.0 161.5 headcount reductions and
Staff 87.5 88.3 85.0 branch network
reconfigurations
Other N/D 23.7 22.5
IT 21.7 19.9 17.3 • Impairments provided a
Property N/D 13.7 12.0 strong lift to profits in
Professional fees N/D 8.5 8.9 2017.
Depreciation & amortisation 8.9 8.1 6.8
Marketing N/D 5.3 4.8 • There was a noticeable
Communication & Travel N/D 3.9 3.9 slowing in IT & associated
cost growth during the
year, although they remain
above the rate of inflation.
Percentage growth 2017

9.9 9
20.7 18.2 5.4
9.1 12.1
7.9
-1
Depreciation & IT Total Staff Impairments
Amortisation
-9.2

Page 13 South Africa Banking Results 2017

Efficiency ratios are trending above the 54 – 55% range

5 year
56.5

average:
55.9

55.8
55.8

56
55.6
55.5
54.9%

55.0
54.8

54.7
54.7

54.6

54.4
54.1
1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17

• Efficiency ratios are rising – driven by slow top-line growth and rising IT investment needs.

• IT and associated amortisation charges account for a rising share of costs.

• Shrinking physical networks are reducing headcount and staff costs.

• The need to launch and refine digital platforms further drives required spend.

• Cost pressures are well managed, but the need for IT investment and rising regulatory compliance will not
disappear any time soon.

• Robotics may change the cost trajectory over the medium term – but an upfront expense is necessary.

Page 14 South Africa Banking Results 2017

 The shift to digital channels grows
Branch networks shrink across the rest of Africa

% change 2017

Employee numbers -2.9

Branch network -10.0

ATM network -6.5

Branch networks across rest of Africa shrink, but ATM footprints are growing

Africa

Branch network -3.2

ATM network +1.2

Major banking
markets

Page 15 South Africa Banking Results 2017

 Local banks face more intense competition
Both locally and in the rest of Africa
Global major banks’ focus areas
► Optimistic outlook but risks are rising (geo-
political shocks and tightening monetary
policy)
► Digital investment to drive business
optimisation
► Revenue growth hinges on technology,
which will focus on platforms, and drive
automation
► Strong focus on customer centric initiatives
and enhancing the customer experience
► Implementation of IFRS9 ‘could represent
up to 30bps of T1 capital’, but it is difficult
to forecast its impact on profits’
Page 16 South Africa Banking Results 2017
SA banks’ focus areas
► Competition will intensify as three new
banks enter the market (Discovery, TYME,
and Bank Zero) and two relaunch (PostBank
and African Bank)
► Lending will remain prudent and pricing will
reflect the true risk of lending
► Ongoing Competition Commission
investigations into forex trading raises the
public profile of the sector
► Fintech remains both an opportunity and a
threat, all banks have a strategy to
digitalise and benefit from digital disruption
► Africa’s potential remains attractive; most
continue investing despite recent
challenges – more diverse portfolios fare
better
► IFRS9 will lead to higher impairment
charges in line with new definitions
With you today
Jane Fitton
Financial Services Africa Leader
Tel +27 11 772 3736
Mobile +27 83 601 1475
E-mail jane.fitton@za.ey.com

Ernest van Rooyen

Financial Services Africa Partner
Tel +27 11 772 5479
Mobile +27 82 778 6263
E-mail ernest.vanrooyen@za.ey.com

Graham Thompson
Africa Knowledge Leader EY
Tel +27 11 772 3202
Mobile: +27 84 242 4454
E-mail graham.thompson@za.ey.com
Insights

EY’s Global Banking Outlook 2018, Pivoting toward innovation-

led change

EY survey of senior bankers at 221 institutions across Europe,

North America, Asia-Pacific and emerging markets shows that
banks are seeking to become digitally mature, completing the
transition from regulatory-driven transformation to innovation-
led change in order to insulate themselves from future
downturns. Today, 19% of respondents consider themselves as
either digitally maturing or a digital leader, but more than 60%
aspire to reach these stages by 2020.

Visit

• ey.com/za
• Building a better working world.com
• Financial Services Insights

@EY_Africa #SABankingAnalysis2018

Page 18
 EY | Assurance | Tax | Transactions | Advisory

About EY
EY is a global leader in assurance, tax, transaction and
advisory services. The insights and quality services we deliver
help build trust and confidence in the capital markets and in
economies the world over. We develop outstanding leaders
who team to deliver on our promises to all of our stakeholders.
In so doing, we play a critical role in building a better working
world for our people, for our clients and for our communities.

EY refers to the global organization and may refer to one or

more of the member firms of Ernst & Young Global Limited,
each of which is a separate legal entity. Ernst & Young Global
Limited, a UK company limited by guarantee, does not provide
services to clients. For more information about our
organization, please visit ey.com.

Ernst & Young LLP is a client-serving member firm of

Ernst & Young Global Limited operating in the US.

© 2018 Ernst & Young LLP.

All Rights Reserved.

This publication contains information in summary form and is therefore intended for
general guidance only. It is not intended to be a substitute for detailed research or
the exercise of professional judgment. Neither Ernst & Young LLP nor any other
member of the global Ernst & Young organization can accept any responsibility for
loss occasioned to any person acting or refraining from action as a result of any
material in this publication. On any specific matter, reference should be made to the
appropriate advisor.

Page 19