Johannesburg – Despite a tough economic environment, the banking sector managed to generate earnings 11 times greater than GDP growth.
The bulk of the profitability in the sector is attributable to Corporate and Investment Banking (CIB).
This is according to analysis on 2016 bank results by firm EY. For the first time since the global financial crisis, CIB earnings exceeded that of Retail Business Banking (RBB).
CIB contributed 33.7% to total profits, this is up from 31.1%. CIB headline earnings were up from R23bn in 2015 to R28bn in 2016, the report showed.
Earnings by wealth declined from R7.3bn to R6.6bn due to from life insurance and weaker stock markets, the report indicated.
Weak conditions in West Africa and interest rate limits in Kenya also impacted the contribution of earnings from business in Africa, which was down from R9.1bn to R8.9bn.
However there is still business potential in Africa. Local banks plan to build their presence in Africa, the report found.
Overall earnings were driven by stronger margins, contained costs and stable impairments, said the report.
Among the strategies banks put in place to generate earnings in a low growth environment, include repricing product portfolios and banks have been more selective of loans granted and the price for risk.
But despite the higher profits, returns have been under pressure due to increasing funding and equity costs. Return on Equity (ROE) declined to 16.8% in 2016, down from 18.5% in 2015. “ROE’s are declining, but remain strong,” said the report. ROE remains above the five year average of 16%.
Negative asset growth
Asset growth was negative for the first time in 20 years, said the report. CIB lending continued to be the strongest, up 8.6%. Lending in Africa contracted 10.8% due to the effects of Nigeria’s shrinking economy and interest rate caps in Kenya which reduced lending, the report said.
Card lending grew 7%, vehicle finance was up 6.3%, and mortgages increased by 5.2%. Business lending grew by a mere 1.3%, the report showed.
Interest income remains a strong source of earnings growth. “Net interest revenue remains solid, despite very low advances growth,” said the report. Interest margins rose across all banks, boosting interest revenue. Net interest income increased by 15%.
This contrasts with a 2.5% increase in non-interest revenue or fee income, which is pressured, said the report. This is due to less credit granted, fewer new transactional customers and slowing corporate demand for credit.
Credit impairments have also remained benign, this is despite expectations that they may rise sharply, said the report.
Going forward, among the focus areas for banks, lending will likely rise given the low impairments, an uptick in economic growth will also boost lending, said the report. However, lending will remain prudent.
Further, given the investigation by the Competition Commission into banks, they will face more public scrutiny, particularly from government, said the report. The banking sector will have to focus on prudential and conduct compliance, said the report.