South Africa’s Big Four banking groups each recently
posted strong annual or interim results despite a weakening
economy. All are investing in their distribution networks to reach
more South Africans as well as looking to increase the penetration
of credit and consumer finance products. Truong Mellor

Despite South Africa’s economy showing signs of slowing down and
a tougher regulatory environment hitting the loans market, South
Africa’s Big Four – Standard Bank, Absa, FirstRand and Nedbank –
continue to deliver strong earnings. For these banks, the two key
areas of focus remain multi-channel distribution and the ongoing
development of the country’s consumer finance and credit

Interim net interest income grew by 36 percent at Standard Bank,
South Africa’s largest banking group, due to strong lending and an
increase in higher margin components of the lending book. Fee-based
income grew by 31 percent, aided by a 10 percent increase in the
number of the bank’s customers. Insurance fee income rose by 24
percent, boosted by more sales through the branch network. The bank
reported a 67 percent increase in the volume of internet

Talking about the year ahead, Jacko Maree, CEO of Standard Bank
Group, said that despite tougher operating conditions moderating
growth, his group’s diversified sources of revenue growth and focus
on risk management should enable it to achieve a normalised return
on equity of 24 percent.

Clampdown on consumer debt

As in Japan (see RBI 577),
banks in South Africa have had to deal with a clampdown on consumer
debt and a tougher regulatory environment for consumer lending. The
introduction of the National Credit Act in June, which aims to
protect customers from over-indebtedness and create a fair and
non-discriminatory market for lending, resulted in a slowdown in
loan application volumes and approval rates.

South Africa’s Competition Commission is also currently
investigating possible transgressions of the Competition Act. It
has recently completed its final round of public hearings, and will
make recommendations for improvements for the industry in a
detailed report to be released towards the end of 2007 (though it
may be delayed until 2008). Absa, which is the country’s
second-largest group and is majority owned by the UK’s Barclays,
says that the direct costs associated with compliance will amount
to ZAR100 million ($15 million).

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Like Standard Bank, Absa also reported an upsurge in online banking
for its interim results. Coupled with a growth in its customer
base, the bank benefited from a rise in transaction volumes; the
level of net fees increased by 17.1 percent. Growth in retail
advances was driven by increased household credit extension –
residential mortgage advances grew by 24.7 percent and credit cards
by 52.5 percent.

But the weak South African rand meant Absa-sourced profits for
UK-based Barclays fell £7 million ($14 million) to £310 million,
after a 20 percent decline in the currency. Absa Group profit grew
32 percent in rand terms, due to, said Barclays, “very strong
growth” in retail banking (earnings up 24.1 percent), Absa
Corporate and Business Bank (up 46.2 percent) and Absa Capital (up
33.3 percent).

One of the best retail banking performances came from Nedbank. Its
retail unit increased headline earnings by 34.5 percent to ZAR956
million and divisional ROE from 24.2 percent to 24.7 percent. The
performance was achieved, said the group, through growth from
bancassurance sales and Nedbank’s wealth division, higher card
revenues driven by both acquiring and issuing volumes, increased
transactional banking volumes, continued growth of the personal
loan and home loan books, and an improved product mix.

Nedbank’s strategy to expand its distribution footprint across
South Africa is a key focus. The bank has invested ZAR368 million
since June 2006 to upgrade and increase its distribution network;
it has opened an additional seven outlets and increased its ATM
network from 1,146 to 1,361 ATMs. Last month, the bank introduced a
customer service initiative called Ask Once, which it says will set
a benchmark for service excellence in South African banking. The
bank has pledged to donate ZAR50 to a Nedbank-approved charity
every time it breaks its Ask Once promise.

The report from the Competition Commission due out at the end of
this year or sometime in 2008 will also shed further light on the
relatively high banking fees South African consumers pay. The
industry was stung earlier this year by Capgemini’s World
Retail Banking Report 2007
which said that the country has
some of the highest retail banking fees in the world: ZAR1,863 in
annual fees against a global average of ZAR731.

While fees have become a hot topic in the South African banking
market, the country’s banks dismissed Capgemini’s findings. On 26
June, for instance, Standard Bank ran a print ad in leading
newspapers stating that its customers have seen an average
effective drop of 16 percent in the cost of transaction banking
charges over the past five years.