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How banking has changed since the financial collapse

Capitec is the market disruptor, placing everyone else’s fees under pressure.

A decade ago, when the economy was growing at between 4% and 5% a year, banking was a beautiful business.

Before the National Credit Act came into force in 2007, banks were throwing money at customers, interest rates were affordable and consumer spending was at an all-time high. Apart from transactional banking, the merchant banking arms of the major banks were spoilt for deals. The fees were sumptuous and ceaseless.

Then came the 2008 collapse. The merchant banking deals started to evaporate, and for those deals still on offer, fees were slashed. Consumer spending went into a tailspin, and the Competition Commission, at the behest of then finance minister Pravin Gordhan, launched an inquiry into banking charges. The Commission’s findings were less than complimentary: “We find that pricing decisions of the banks are driven by a number of considerations but are generally constrained only by what the customer will bear.”

That’s another way of saying South Africans were being gouged. After the financial collapse, it was time to get back to banking basics. Since then, fees have been under pressure, but some would say the pressure is not nearly enough.

The two banks that most aggressively pursued new retail customers in recent years were FNB and Capitec. A decade ago, Capitec was an upstart bank and no-one paid it much attention. That’s certainly changed. Its rate of growth has been something to behold. It now has 8.6 million active clients, adding 1.3 million in the last financial year alone – much of this through word of mouth. Its technology-heavy transactional platform allowed it to keep costs to a minimum. FNB grew its retail customer base by 10% and its business banking clientele by 14% in the last financial year to June 2016.

Capitec’s cost-to-income ratio, at 0.77, is about half that of the other major banks. By virtually any measure it is way ahead of the pack. Its return on assets hit double digits in the last few years, placing it leagues ahead of the opposition. Its aggressive pursuit of new customers, utilising a low-cost delivery and transactional system, has paid off handsomely. As Capitec Bank CEO Gerrie Fourie recently stated, the bank’s success relies on the fundamentals of delivering simplified banking that is affordable and easy to access through personal service. “This resonates with most South Africans and is what sets us apart, especially in the current tough economic climate, giving clients a sense of value and allowing them to feel in control of their money.”

Charl Kocks of Ratings Afrika says competition for fee-earning income among banks is intense, and in many cases, it’s a zero-sum game: “If one bank wins a government or municipal account, another bank is losing. The one factor that has helped in growing the banking market is the growth in the middle class. Though consumer spending is not what it was 10 years ago, this has made transactional banking a relatively stable and profitable business, though the big beneficiaries here have been FNB and Capitec.”

Where Capitec doesn’t score so well is in the non-interest fee income space. That’s typically made up of transaction fees, merchant banking, asset management and the dozens of other fee-earning services offered by the banks.

Figures from Dealmakers show the extent to which merchant banks have been hit by falling corporate activity. In 2007, there were 550 deals valued at R470 billion. In 2008, the year of the financial collapse, there were 391 deals, but the value was an astronomical R1.06 trillion. Things went downhill from there. By 2011, the number of deals had fallen to 385, valued at just R193 billion. Three years after the collapse, deal activity was less than 20% of the 2008 peak.

Last year there were 578 deals valued at a staggering R3.7 trillion, though even this is somewhat deceptive. Because so much corporate activity is cross-border, a lot of the juiciest deals now go to foreign banks with the international presence SA companies are seeking.

This explains in part why non-interest income as a ratio of total income has been on the wane for several SA banks, as shown in the accompanying table. While there are bank-specific reasons for this decline, there is a clear pattern on display. The one obvious exception to this is Investec, which has substantially increased its non-interest income after establishing a regional footprint in the UK. It is a specialist bank with a strong asset management arm, and is not strictly comparable to the others.

Standard Bank sold a 60% stake in its UK operations to Industrial and Commercial Bank of China two years ago. The 34% increase in profits last year shows the extent to which the loss-making UK operation was dragging it down. As the table below shows, Standard’s ratio of non-interest to interest-earning income is a fraction of what it was a decade ago.

Chasing fees will always be a top priority for the banks, since these activities make less claim on the balance sheet. When it comes to transaction-based fees, such as on bounced debit orders, banks are going to fight to keep these being regulated lower. When it comes to fees from corporate advisory and debt-raising activities, there’s a big cost associated with this. Top-flight advisors don’t come cheap, and when the deal flow dries up, banks will again take an axe to the headcount.

Banks play a crucial role in making daily business and similar transactions safe, fast and reliable. The question is whether the fees we are being charged are fair. The difference in fees charged by Capitec (on bounced debit orders, for example) compared to the others suggests there is plenty scope for more aggressive competition.

What’s keeping the banking market interesting for the moment is a renewal in corporate activity, and a steady growth in the middle class. The Competition Commission investigation into banking found that customers are often loathe to switch banks, even when they’re being treated badly. That’s clearly changing, as Capitec has shown. Simple, easy-to-understand banking at a low cost will always find its way into the South African mainstream.

 

Non-interest Income to Total Income

 

2017

2016

2015

2014

2013

2012

2007

Standard Bank

   

0.45

0.51

1.59

1.35

1.97

2.14

FirstRand

   

1.20

1.20

1.95

1.71

1.72

1.6

Nedbank

 

0.52

1.11

1.08

1.07

1.05

1.06

0.97

Barclays Africa

   

0.94

0.97

1.01

1.04

1.04

1.25

Capitec

 

0.16

0.09

0.43

0.24

0.67

1.09

0.49

Investec

 

3.59

3.71

4.04

4.68

5.16

4.62

1.97

                 
                 

Return on Total Assets

 

2017

2016

2015

2014

2013

2012

2007

Standard Bank

   

2.48

2.41

1.03

3.14

2.3

2.27

FirstRand

   

2.07

2.12

2.06

1.89

1.73

1.6

Nedbank

 

1.23

1.25

2.36

2.45

1.13

0.99

1.3

Barclays Africa

   

2.97

2.6

2.77

2.72

2.78

1.68

Capitec

 

9.65

10.82

14.05

11.58

5.94

6.6

11.1

Investec

 

1.2

1.15

0.89

0.9

0.76

0.68

1.84

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Not sure what the intent of this article is/was but maybe a more in-depth review may be more helpful i.e. Nedbank’s non interest income halved from 2016 to 2017 – why, or how did they achieve this or is this for 6 months (the ratio won’t change if 1/2 years figures are used as it is an expression of the total assets)
So notes or explanations would assist in coming to one’s own conclusions.

Sounds more like a Capitec praise-song than an article on the banking sector.

Well anything that brings down banking and credit card costs is good for the consumer,, banks are aware that their core functions are about to be replaced by Crypto currencies as they are better/cheaper/safer to use. If they are awake they can implement some of the crypto-worlds blockchain technology and smart contracts to receive some valuable savings in their business. Many of their systems are outdated and expensive and they are fast losing consumers trust with their ‘shenanigans’ and fees!

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