Negative ‘jaws’ bite South African banks battling costs

Bloomberg

The bottom line is that the top line stinks. That’s the challenge facing South Africa’s biggest banks as they fight to contain costs that are accelerating faster than revenue.
The reasons are pretty much the same: South Africa’s economy hasn’t expanded at more than 2 percent a year since 2013 and unemployment is at 27 percent. In addition, consumers are being battered by rising taxes, fuel prices, and higher utility bills. Companies, meanwhile, are waiting to invest until they get clarity on land expropriation and state-owned companies so deeply mired in debt that they threaten the state’s finances. That’s why many lenders are looking to the rest of Africa, but home is still where the money lies.
“This is showing just how tough the South African environment has been, while their African operations are outperforming,” said Patrice Rassou, the head of equity research at Sanlam Investment Management in Cape Town. “It’s a function of low top-line growth and rising costs.”
The nation’s so-called Big Four — Standard Bank Group Ltd., FirstRand Ltd., Absa Group Ltd. and Nedbank Group Ltd. — all reported results that either disappointed or forewarned investors that targets are becoming increasingly difficult to hit. All of them suffer in differing degrees from what is known in banking parlance as “negative jaws”: when costs grow faster than income.

FOGGY OUTLOOK
The outlook is foggy too. FirstRand said that full-year earnings growth may not beat inflation because of private-equity gains in 2018 that won’t be repeated, while Nedbank said last week it’s becoming increasingly challenging to reduce its cost-to-income ratio. Besides, even if the lenders do manage to boost revenue, they face the prospect of bad debts rising from levels near historical lows, said Rassou.
The reprieve of credit-loss ratios that range from 53 basis points at Nedbank to 86 basis points at FirstRand is helping to lift earnings. There are also so-me signs of life, with last six mo-nths of 2018 showing improved revenue and profit growth.
Adjusted earnings per share at FirstRand rose 6 percent in the six months through December, the only one of the larger banks that has a year-end in June. The second half of 2018 also saw profit accelerate by 4 percent at Absa, from 3 percent in the prior six months, and 8 percent at Standard Bank, compared with 5 percent previously, according to data compiled by Bloomberg. Earnings growth slowed to 3.5 percent at Nedbank after a rebound in its investment in pan-African Ecobank Transnational Inc. in the first half of 2018 resulted in a 26 percent jump in profit.

‘ONLY WAY’
Nedbank, which makes half of its earnings from corporate and investment banking, will benefit once companies regain trust, and Standard Bank and Absa will continue to reap gains from their expansion
into Africa, said Nolwandle Mthombeni, an equity analyst at Mergence Investment Managers. FirstRand’s First National Bank led the way in consumer lending by cross-selling more of its products to customers, showing that it pays to invest in digital platforms that engage with customers, she said. “As a bank you have to lend to grow, it’s the only way,” Mthombeni said.