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Banking opportunities in Africa look less rosy

SA banks face low growth here, weak commodity prices abroad.

JOHANNESBURG – Low domestic growth prospects are prompting South African banks to look to the rest of Africa for growth opportunities, where weak commodity prices in certain key economies could also impact negatively on revenues, says EY.

Given South Africa’s weak macro environment, the historic growth rates enjoyed by domestic banks are unsustainable, according to EY’s financial services sector leader for Africa, Emilio Pera.

With a GDP growth rate of just 2% now expected in South Africa in 2015, compared with close to 5% for sub-Saharan Africa, it’s not difficult to see why domestic banks are embarking on major expansion plans into faster growing economies north of our borders.

In fact, a quick glance at recent earnings reports reveals that each of the Big Four banks is explicit on wanting to be the best bank in Africa.

However, countries hardest hit by lower oil prices, including Nigeria and Angola, will impact negatively on banking revenues, Pera said. In its 2014 SA Banking Review EY notes that “rapidly falling oil prices and sustained low commodity prices resulted in deteriorating exposures in rest-of-Africa” for banks.

“You might even have some surprises as far as corporate bad debts or losses,” Pera told Moneyweb of his 2015 outlook, noting that this was dependent on the direction of oil prices and for how long they remained low.

FirstRand increases provisions for commodity exposure

Speaking of potential losses arising out of corporate bad debts, FirstRand reported a 26% jump to R3 billion in the group’s bad debt charge for the six months to December 2014, driven primarily by increases in portfolio provisioning or “overlays” to underlying commodity exposures in its corporate book.

FirstRand emphasised that the bad debt charge was not a function of defaults, although non-performing loans did increase in RMB’s investment banking division, but a “strengthening of balance sheet” in response to corporate exposures in oil and gas, and mining and metals. 

Speaking at its interim results this week, deputy CEO Johan Burger said that FirstRand deemed the provisioning “prudent, given where we are in the cycle”.

“Even though we are reasonably happy with the quality of our oil and gas exposures, we just don’t know what the secondary affect is going to be… which is why we decided to create these overlays,” FirstRand CEO, Sizwe Nxasana told Moneyweb.

According to a stock exchange filing by FirstRand, “The total direct exposures to cross-border oil and gas counters comprise approximately 2% of the RMB corporate and investment banking (CIB) lending book, and less than 1% of FirstRand’s advances book.”

Despite no defaults in the portfolio, FirstRand said it created overlays “given the uncertainty on the outlook for oil prices in the current cycle”.

FirstRand has a R27 billion corporate exposure to the rest of Africa, which accounts for 11% of the group’s total corporate exposure (R249 billion).

Moderate growth outlook

“We have seen growth, but the rate of growth has definitely slowed down,” Pera said of the banks’ 2014 performance. Specifically, banks were careful in choosing which segments to grow their businesses in, Pera said.

For example, growth rates in unsecured lending have come down dramatically from where they were two or three years ago. Mortgage growth was also constrained last year, according to EY, which noted “mortgage growth has remained static for a number of years”.

Across the Big Four banks and Investec, headline earnings grew 11.6% in 2014, despite GDP growth of 1.5%. “I expect a similar rate of growth into the new year, not a slowing down necessarily, but not a huge change on the upside,” Pera said.  

Impairments were down across the industry last year, with advances growing roughly 9% and collective return on equity up by 50 basis points.

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I just wish there is another way of banking my money without there so called BANK because we are charged too much money indirect,i believe in every account,every individual including business accounts per account they make more than R100 every months,pity we dont have any options but to be honest our bank charges are too high they must review their prices.

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