South African banks managed to yield steady earnings in a challenging economic environment. While some banks took a knock from the mixed-performance of their African operations, others managed to weather the storms in these markets. Overall there is still a business case for SA banks to continue their operations in Africa, said an analyst.
Analysis on interim results of the big four banks, by EY, shows that earnings were barely positive, up 0.3% in real terms. Earnings growth slowed to 5.7% for the first half of the year compared to 6.6% reported in the same period last year.
Low revenue growth is behind the low growth in profit. Banks have held back on extending credit, particularly in African markets with weak economic activity, said Andy Bates EY's financial services leader for Africa.
Nigeria, a commodity-led economy, was in recession and Kenya introduced restrictions on lending, explained Bates. Other economies like Mozambique also struggled, which weighed down on profits. "Returns are not as high as banks would like."
Nedbank's profits were negatively impacted by the performance of its West African partner Ecobank Transnational, of which it has a 20% stake. The bulk of earnings are made from Nigeria, Bloomberg reported. The bank reported a 3.7% decline in half-year profit, driven by the loss from Ecobank. Nedbank maintained that the outlook for Ecobank is improving.
Standard Bank's results were mainly impacted by currency movements, which reduced group headline earnings 7% compared to the previous period. But the group reported an 11% rise in profits.
African regions increased their contribution to headline earnings to 29%, contributing positively to Return on Equity (ROE) and Headline Earnings Per Share (HEPS) growth, the group said in its interim report. "The top five contributors to Africa Regions' headline earnings were Angola, Ghana, Mozambique, Nigeria and Uganda."
Standard Bank operates across 19 African countries, excluding South Africa, with diverse dynamics across these regions. Prospects are improving in oil-dominated economies like Nigeria and Angola, while East Africa suffered the effects of a drought.
The group experienced a slowdown in credit growth in Kenya, given the effects of the drought and regulatory caps and floors introduced for loans, and pre-election anxiety, the report indicated. Mozambique's currency also stabilised in the first half of the year.
"The combination of higher rates, higher cash balances on the back of foreign currency liquidity constraints, flight to quality and improved macros provided support for the Africa Regions' performance," the report read.
FNB's performance was mainly driven by domestic activity, as rest of Africa profit before tax declined 32%. FNB South Africa accounts for 95% or R17.9bn of total FNB profits before tax. FNB grew profits by 5%.
FNB Africa's operations are across Namibia and Botswana, Mozambique, Zambia, Tanzania and Ghana, according to the report. These markets faced economic headwinds and emerging regulatory challenges, and delivered a mixed performance, the report read.
FNB CEO Jacques Celliers said that the bank was still committed to expansion in Africa. In an interview with Fin24 he said that the challenge in these markets is that banks are often not known when they enter the market. "We know our reputation is made in tough times... We must prove our commitment in tough times," he said.
Celliers explained that an effort must be made to build relationships, and invest in banking infrastructure in these regions. FNB did this in South Africa and now has a 180 year history because of the long-term relationships it built.
He said that although the economic environment in Zambia and Mozambique was "vicious", the bank will keep its spirits up and continue to invest through the cycle. He added that there are opportunities in the east, in Kenya and Tanzania and the west, in Nigeria and Ghana.
"It is a very difficult climate and we have to be conscious about it. We need to position the strategy to weather the storms. But we are also excited about the opportunities."
Barclays Africa's mid-year profits rose 7% and headline earnings growth was driven by African operations which were up 19%. "Economic performance in the group's presence markets in the rest of Africa was mixed," the report read. The group experienced improving outcomes in Ghana, Mozambique and Uganda, while endured weaker trends in Kenya, Zambia and Botswana, according to the report.
UK-based Barclays had sold its stake in Barclays Africa earlier this year and chief executive Maria Ramos shared on the prospects of building a Pan-African business. "This is a defining moment for Barclays Africa, a significant opportunity to determine our own destiny and make our own decisions on what is right for a standalone African business," she said previously. "It gives us an opportunity to look differently at our business and it is exciting for us to do that in this continent."
Ramos also said that the opportunities in the continent outweighed the challenges and the bank was well poised to take advantage of the opportunities.
Business case for Africa
But Bates explained that there is still a business case for banks to continue operations in Africa. It depends on banks to individually consider making long-term decisions which may impact shareholder returns in the short term.
The big four banks have a "decent" footprint in Africa. "What we see is a desire to continue to invest, but not as quick as the banks would like," he said. There is also the pressure of costs associated with the investment.
But given the average age of the population across Africa, which is quite young and the amount of unbanked people there is a great opportunity for them to join the formal banking sector, explained Bates. There is not just a demand for banking products, but also for wealth and asset management, insurance and pension products. "This is a massive opportunity not one South African bank can afford to ignore," said Bates.