LOOKING NORTH
Rapid domestic growth ‘is not sustainable’
Major South African banks may have to pin their growth prospects on African expansion because their strong domestic growth is not sustainable in the medium term, Fitch Ratings says.
MAJOR South African retail banks might have to pin their longer-term growth prospects on African expansion because the current growth in the domestic environment was not of a sustainable nature, global rating agency Fitch Ratings said on Friday.
The agency published its latest South African banks peer review report in which it noted that while the big banks had strong earnings growth in 2012, this was not sustainable.
Fitch said the consistently low interest rates, slow gross domestic product growth and a relatively saturated lending market were likely to put pressure on credit growth of these banks’ traditional businesses. With unsecured lending also on the decrease, the shrinkage in banks’ loan books in the long term was inevitable.
“Near-term improvements may still be possible from higher margins arising from the trending change in loan book mix, with strong growth in unsecured personal lending and vehicle financing at the major banks, excluding Investec. [But] we expect the rate of unsecured lending growth to slow in light of its weak performance and potential systemic implications,” said Denzil De Bie, a director in Fitch’s financial institutions team.
He said because of this, Fitch believed that longer-term growth prospects would be driven by expansion into the rest of Africa for many of the major banks.
Already all the big four local banks – Absa, Standard Bank, FirstRand and Nedbank – have made significant strides in expanding their operations on the continent to markets outside South Africa.
Standard Bank currently operates in 17 other countries in Africa. FirstRand, through Rand Merchant Bank and FNB, has full service banking operations in five countries outside South Africa and three representative offices. Nedbank, through its alliance with Ecobank, has access to 35 other
In the medium term, Fitch said it expected the annual loan loss impairments for banks to stabilise.
African countries apart from its own operations in five other Southern African Development Community countries.
Absa recently got approval to acquire all Barclays’ African operations across 10 countries, giving it the status of being the continent’s largest retail bank by branch networks and customers. The banking group even changed its trading name to Barclays Africa Group on the JSE on Friday.
Jean Pierre Verster, an analyst at 36One Asset Management said although Africa presented good opportunities for the banks’ long-term prospects, expansion on the continent was not going to be rewarding for some time.
He said recent history had proven that doing business and expanding in Africa was a difficult and costly task.
“FirstRand, which has the least exposure in Africa, has grown its earnings the strongest in the last few years. Standard Bank, which has the most extensive operations on the continent, has had lacklustre growth,” he said.
Verster said because of the higher cost base of doing business in Africa – mainly because of electricity supply problems – as well as the small size of the consumer market and the large number of competing banks, it would take a long time before the earnings growth of the big four banks was driven by their African operations.
“Of course this will be different for Absa because of the mathematics of their deal with Barclays,” he said.
On a positive note, Fitch noted that despite the unfavourable local operating environment, South African banks’ non-performing loan ratios had been improving since 2010 on the back of sustained low interest rates.
In the medium term, the agency said it expected the annual loan loss impairments for the major banks, excluding Investec, to stabilise
Investec’s impairment charge ratio would remain stable at a lower level due to its different loan book composition as a specialist bank and asset manager. Fitch rated the big four banks’ viability ratings at BBB and Investec was rated one notch lower at BBB-.