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SA’s banks have high fees, operating costs – index

Findings from BCG’s retail banking index.

JOHANNESBURG – South African banks are expensive and their operating costs are high.

According to global management consulting firm, The Boston Consulting Group (BCG), local banks charge their customers higher fees than their international counterparts.

“Competition around pricing has increased over the past year, but we have not yet seen a dramatic shift towards lower bank fees,” commented Michael Seeberg, a principal in BCG’s financial services practice.

Seeberg was addressing media at a roundtable discussion on Tuesday, where the 2013 findings of BCG’s retail banking index (RBI) for South African banks were released.

The RBI for South Africa is an analytical tool tracking the performance of South Africa’s main retail banks. It is based on the financial results reported by the six leading retail banks in the country, including the Big Four (Barclays Africa, FNB, Nedbank and Standard Bank), as well as African Bank and Capitec.

According to BCG, these six banks make up around 90% of the retail banking market in South Africa. 

Bank revenues grew too fast

Senior partner and managing director in BCG’s financial services practice, Michael Krupp, said that banking revenues generally grew at the same rate as the nominal rate of GDP growth. “If the revenue growth of banks deviates from GDP growth in the long run, you build a system that is not very health or sound,” Krupp said.

In 2013, South Africa’s leading retail banks increased revenues by 14% compared to 2012, far ahead of the roughly 6% GDP growth achieved by the country in nominal terms (1.9% in real terms).

Headline earnings expanded at a slower pace, posting a 2% nominal increase relative to the end of 2012 and a slight decrease in real terms.

Source: The Boston Consulting Group

Income was largely driven by net-interest revenues, which grew 17% over 2013 and accounted for 59% of total banking revenues in the second half of 2013.

This was due to both volume growth in loans, which grew 7% and increasing margins, due to a higher share of unsecured lending and a declining share of home loans in banks’ book. 

Impairments rose 17% in 2013 and Krupp said the quality of bank balance sheets looked “a bit worse than before”. “This is the reason that HEPS was basically stable,” said Krupp.

“There was a striking difference between the volume of unsecured loans made in the second half of 2013 compared to the first half, with impairments rising 2% in the second half of the year. This indicates that banks cleaned up their loan books and made greater provisions for loans,” added Seeberg.

Source: The Boston Consulting Group

Opportunities for new entrants

Alongside impairments, operating expenses climbed markedly, as banks competed more on innovation than on price.


Source: The Boston Consulting Group

“Banks are making technology investments in response to changing customer behaviours. They can, with these investments, improve overall efficiency going forward and grow market share, but it is placing more pressure on margins and fees,” commented Seeberg.

Ongoing competition on the innovation front would keep operating expenses high and generate less motivation among traditional banks to lower fees.

Technology innovations were only adding to branch infrastructure, rather than replacing it. This kept costs high, especially since much of the “quality contact” that drove revenue was still done in branches, even if there was an increase in the quantity of online contact with customers. 

“As soon as technology leads to the replacement of the need for sales contacts in branches and drives new business and product purchases via online channels, there will be cost reductions,” said Krupp.

While this opened opportunities for niche players with attractive pricing and lower operating costs (like Capitec) to grab market share, traditional banks remained protected by the regulator, who kept the barrier to entry high (just try getting a banking license).

“Attracting foreign direct investment is very important for South Africa and having a stable and well-regulated banking sector is one of the key anchor points for investors. This means that the regulator looks more carefully at newer market entrants,” said Seeberg.

Equally, there is significant investor interest in financial services across the world, with private equity firms eyeing the sector’s potential, according to Krupp.

This has led to the mushrooming of banking-related services, such as peer-to-peer lending, where in many cases service providers partner with established banks or use banking platforms to avoid the high business and compliance costs of creating their own.

“It is difficult to start a bank for good reason, because the regulator is protecting a stable financial services sector and avoiding ruinous competition on the price side,” commented Krupp.

“But if the regulator were to allow new start-ups where the attacking point was price, we could see lower fees,” he said.

That South Africa’s financial services sector was attractive, said Seeberg, was evidenced by the sale of local consumer finance business RCS (formerly jointly owned by The Foschini Group and Standard Bank) to BNP Paribas Personal Finance.

“This reflects one of the first entrants in the retail banking space in South Africa from abroad for quite some time,” Seeberg said.   

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