With both performance and assets outstripping the continent’s other large emerging markets in Egypt, Nigeria and Morocco, South Africa’s banking sector is the biggest and most developed on the continent. The country’s largest banks have branch networks across the region and – unusually for many African institutions – they also have the ability to finance capital-heavy projects. The retail segment is catered to equally well, with a penetration rate of 75% compared to an average of around 25% in the rest of sub-Saharan Africa. Financial services contribute 11% to GDP and 4% to employment.

The economic slowdown has affected banks indirectly, and sovereign rating revisions and unsecured lending, as well as new regulatory requirements, will need careful navigation in the near term. However, strong results were still posted in 2013, and the broader outlook for the country’s banks – both domestically and abroad – is bullish.

Macro Context

South Africa’s economy has been shaken by the fallout of the global financial crisis: the rand has seen unusual volatility and demand from key markets in Europe and Asia have dropped. However, the country’s banks have been well-buffered, and oversight is robust, with South Africa regularly ranking at the top of global tables for the quality of its regulatory framework.

Furthermore, the country’s banks have limited offshore exposure: according to Rene van Wyk, registrar of banks at the South African Reserve Bank (SARB), rand balance sheets are not exposed to dollar assets as funding is largely rand-based, which further limited their susceptibility to the 2008 crisis.

Although its fundamentals remain sound and balance sheets healthy, South Africa’s macro challenges – including delays on large infrastructure investments – have slowed down banking activity. As a result, the 2013 project pipeline is more constrained. According to Stats SA, the statistics agency, GDP in 2013 expanded by 1.9%, resulting in limited credit growth and investment. “With the economy not showing strong growth, we cannot expect the banking sector to be flourishing. Nonetheless, the sector is posting good results,” said Van Wyk.

With growth forecasts inching up over the next two years, banks expect to see an uptick in demand for new project financing and lending. “2013 saw a buildup of liquidity in the market as most of big businesses were reluctant to make large investment decisions. With a string of infrastructure projects in the pipeline, pools of liquidity are available to finance them; however, the transition from conception to bankability must be accelerated,” Donna Oosthuyse, director of capital markets at the Johannesburg Stock Exchange (JSE), told OBG.

The SARB raised interest rates in January 2014 from the long-standing level of 5% to 5.5%. There was another 25-basis point increase in mid-2014, and further hikes are likely as inflation has breached the 6% upper limit of the target range for much of 2014.

Household Activity

The country’s savings rate has long been falling. The savings-to-GDP ratio was 13.5% in 2013, according to the IMF, down from 14.2% in 2012 and a sharp decrease on the 35% seen in the 1980s as well as compared to other emerging markets such as Nigeria (29.2%) and India (30.2%).

The government’s Vision 2030 document – the National Development Plan – seeks to increase the savings rate to 25% by 2030. Today, households contribute only 1.7% to the gross savings rate, a result of high unemployment, low growth and a drop in take-home income due to lost wages in certain segments of the household sector following strikes. By contrast, household consumption expenditure accounts for some two-thirds of GDP.

Indebtedness is also on the rise in the country (see analysis). The debt-to-household income ratio was 75% at the end of the first half of 2014, according to Easy Data’s quarterly economic review of July 2014, due in part to a significant increase in unsecured lending programmes. “Unsecured lending has led to high levels of indebtedness despite the spike in retail growth it initially provided. The credit bubble was self-replicating, with private or household debt reaching unsustainable levels, and we are seeing banks retrenching on lending as a result,” Adam Cracker, CEO of IQ Business, told OBG.

Strong Performance

Nevertheless, bank margins were still strong in 2013 and were boosted by higher dollar lending across the continent, as banks hedged to prepare for the increasing interest rate cycle. Cas Coovadia, managing director of the Banking Association, said, “Corporates are deleveraging, the economy has mediocre growth, but banks are doing fine.” In the first half of 2014 banks outperformed the JSE’s All Share Index.

The six largest banks recovered from a bearish spell after the SARB’s January 2014 rate hike of 50 basis points, and saw share prices rise by 25% compared to the 15% gain on the all shares index.

Bank sector assets rose by 9% year-on-year (y-oy) and almost broke the R4trn ($378.8bn) level at the end of 2013, representing more than half of total financial services industry assets. In terms of non-interest income revenue, the banks continued to focus on higher primary account customer transaction volumes, resulting in a 10.6% increase in net fee and commission income in 2013. Fair value income and insurance premiums also contributed to non-interest income growth. Deposit growth reached 25% annually between 2004 and 2007, then plummeted to negligible growth in 2009 in the wake of the global financial crisis. Growth rates have hovered around 10% for the past two years. Pension funds represent the bulk of long-term deposits, while two-thirds of deposits are short-term.

The lower levels of activity can be seen in the y-oy change in lending, particularly in the second half of the year after strikes had slowed output in mining and manufacturing. Gross loans and advances grew by just 4.3% in the second half of 2013, slower than first-half growth of 7.5%. The industry’s nonperforming loan (NPL) ratios continued on a downward trend, recording annual decreases from 5.9% in 2009 to 3.6% in 2013. Bad debts of major banks were lower than expected in the second half of 2013, partly due to a subdued credit cycle. According to a 2013 South African banking survey by PwC, the slow credit cycle appears to have bottomed, and credit pressure will materialise over the short term as the effects of the upward-trending interest rate cycle set in. Industry deposits (including current accounts and other creditors) rose 8% y-o-y in August 2014, from R3trn ($284.1m) to R3.2trn ($303m), while the costto-income ratio rose from 52.29% to 54.89%.

Meanwhile, the industry’s return on equity (ROE) fell from 16.02% to 13.43%, while return on assets fell y-o-y from 1.2% to 1% in August 2014. Profits increased from R48.7bn ($4.6bn) to R51.6bn ($4.9bn) in the 12 months to August 2013 and 2014. Net interest income grew by 15% in the 12 months to August 2014 to R123.3bn ($11.7bn), while non-interest income fell by 1.2% to R97.5bn ($9.2bn).

Meanwhile, South Africa was ranked third out of 148 countries in the World Economic Forum’s “Global Competitiveness Index 2013-14” and sixth out of 144 economies in the 2014-15 rankings in terms of the soundness of banks, with the country’s banks considered generally healthy with sound balance sheets.

Actors Big And Small

After a period of consolidation, the 44 registered banks in the country in 2001 are down to 20 today, made up of 17 registered and three mutual banks. In addition, as of August 2014, there were 14 South African branches of foreign banks and 43 foreign banks with approved local representative offices.

Despite the large number of players, South Africa’s banking sector is dominated by four large banks – Standard Bank, FirstRand, Barclays Africa Group and Nedbank – which collectively accounted for 83% of total banking assets, according to SARB. (Barclays Africa Group was formed from a 2013 merger of Absa with UK-based bank’s Africa operations.) These are known as the big four, and while a depreciating rand has the effect of slightly reducing their comparative levels of capital abroad, each has a footprint on the continent that exceeds that of the nearest non-South African competitor, Morocco’s Attijariwafa.

In mid-2014, FirstRand overtook Standard Bank as the largest bank by market capitalisation, and as of mid-October 2014 had a total market capitalisation of R232bn ($22bn), compared to Standard Bank’s R202bn ($19.1bn). In terms of tier-1 capital, Standard Bank had the highest capitalisation at $10.57bn, followed by FirstRand with $7.83bn, Absa ex-Barclays with $5.9bn and Nedbank with $5.11bn, according to The Banker’s Top 1000 annual rankings for 2014.

Still Strong

The big four saw particularly encouraging results in 2013, with a combined increase of 24.5% in headline earnings to R27.6bn ($2.6bn) at the end of the year, according to PwC’s South Africa Major Banks Analysis from March 2014. The key earnings drivers during this period were strong net interest income growth of 18.4%, solid non-interest income growth of 9.8%, and reduced impairment charges.

Average ROE for the big four was 17.5% at the end of 2013, compared to 15.9% in 2012 and 16.2% in 2011. Before the global financial crisis and South Africa’s economic slowdown, ROEs were higher, at around 25%. “This is the new normal. Forget about ROEs of a few years ago,” Coovadia said. The big four banks’ combined cost-to-income ratio, a measure of efficiency, deteriorated slightly from 54.2% in the first half of 2013 to 56.6% in the second half. This was a reflection of salaries – which represent half of bank expenses – growing faster than inflation, as well as a weaker rand dragging expenses.

Nedbank’s first-half 2014 profits were up 16% because of a fall in bad debts and stronger lending figures, while Standard Bank ended the first half of 2014 with flat earnings, due in part to an $80m valuation adjustment. Absa Bank – which in 2013 combined with UK-based Barclays’ Africa operations under the name Barclays Africa Group – saw its 2013 profits go up 14% to R11.8bn ($1.1bn), owing largely to lower credit impairments and improved mortgage earnings, while FirstRand saw results for the half year ending December 2013 up as well, with earnings increased by 21%. Net interest income was the main driver, up 22%, while non-interest income grew by 13%.

Mergers & Growth

Following an attempt by HSBC to acquire Nedbank in 2012, which failed to materialise, the 2013 survey by PwC found that the likelihood of new entrants is low, although foreign banks have sought to open new branches and representative offices in recent months. India’s largest private sector lender, ICICI, announced in 2014 that it will convert its Johannesburg representative office into a fully operational branch to focus on Indian companies investing in South Africa. India’s Canara Bank also opened a branch in South Africa the same year, with additional branches planned in Durban, Cape Town and Pretoria.

Smaller mergers have also been attempted. Grindrod Bank, which focuses heavily on the lowerincome and retail segments, recently received an unsolicited offer from Bidvest, an international investment holding company, for an undisclosed amount, but the two banks announced in October 2014 that they had failed to reach an agreement.

Another bank also focusing on the retail segment, Ubank, has also been looking for a buyer, according to local news reports.

Continental Expansion

The appeal of South Africa as a base for overseas institutions is clear as activity picks up elsewhere on the continent. “Banks’ balance sheets are changing, as a greater portion of business is shifting to the rest of Africa where opportunities exist in infrastructure, mining, government financing and transactional banking,” said Johannes Grosskopf, the banking and capital markets leader at PwC South Africa.

South African banks have long been active participants in financial markets elsewhere in Africa, according to Mike Brown, CEO of Nedbank. Continuing to do so, says Brown, will be necessary as the banks’ South African customers expand their activities across the continent, a development which gives the banks’ shareholders access to higher growth markets.

Standard Bank currently operates in 20 African countries and the bank is expected to expand into West Africa in the next couple of years, while FirstRand has full-service banking operations in eight African countries, investment banking in one (Nigeria), and representative offices in two (Kenya and Angola). In September 2014 FirstRand announced that it had set aside some R10bn ($947m) for expansion in Africa. It recently gained a licence to operate in Ghana.

Meanwhile, Nedbank has full offices in six African countries: South Africa, Namibia, Swaziland, Lesotho, Zimbabwe, and Malawi and in addition has representative offices in Kenya and Angola. The bank has just entered Mozambique with a 36.4% stake in Banco Unico and is now looking at Botswana and Zambia as well as West and Central Africa through a 20% stake in Ecobank. With the Ecobank deal, Nedbank says it has a presence in 39 African countries.

Absa – through Barclays – is present in 15 African countries. In 2014 the bank announced that it was seeking full banking operations in Nigeria by 2016.

Twin Peaks

The SARB has a well-deserved reputation as one of the world’s most robust banking supervisors, although a major regulatory shift due to take effect in 2015 relates to a change in how regulation itself is implemented. A new regulatory oversight system – a so-called twin peaks model – is being phased in, whereby prudential and market conduct regulation will be split between the SARB and the Financial Services Board (FSB), respectively. Whereas under the previous system the SARB has overseen banks and the FSB has regulated other financial service providers such as insurers and pension funds, twin peaks shifts to a more integrated approach.


The SARB will be responsible for both micro- and macro-prudential supervision and regulation. Micro-prudential regulation aims to secure the safety and soundness of financial services providers and financial market infrastructure such as the stock exchange. Macro-prudential regulation promotes the stability of the financial system as a whole, and includes crisis management and resolution. The FSB will serve as the market conduct regulator, protecting consumers from adverse outcomes such as market abuse and fraud. Market conduct was first legislated a decade ago through the 2004 Financial Advisory and Intermediary Services Act. The new programme will be formally legislated through the Financial Sector Regulation Bill, expected to pass at the end of 2014 or early 2015. This bill is underpinned by two policy papers published in the wake of the 2008 global financial crisis: a National Treasury document titled “A Safer Financial Sector to Serve South Africa Better” (2011) – more commonly known as the “Red Book” – and “A Roadmap for Implementing Twin Peaks Reforms” (2013).

Over the past year the SARB has been boosting its staffing to prepare for twin peaks. Staffing increases were cited as a reason for the SARB’s 14.6% increase in operating costs in the 2013/14 financial year.

The FSB sees the move to twin peaks as an opportunity to break out of the relatively narrow model now in use. “We are moving from a sector-based approach to a cross-cutting activity-based approach in respect to market conduct regulation,” Leanne Jackson, head of market conduct strategy at the FSB, told OBG.

The SARB’s Van Wyk is also supportive of this effort, and says that the result of better coordination will be more effective regulation, which will in turn feed more cross-specialisation. While banks support regulation to protect both themselves and their customers, a flurry of recent changes brought about by an evolving Basel III regime and other new regulation has placed a burden on banks (see analysis). “Increased compliance costs have been onerous for the banking sector, especially for smaller banks whose relative fixed costs are greater than those of the larger firms,” said Roland Sassoon, CEO of Sasfin Bank.

Unsecured Trouble

The governor will inherit a financial services sector where – refreshingly for the industry after 2008 – major issues are few and far between. However, there are some concerns that have prompted the SARB to take action in recent years. Overall, as Nedbank’s Brown observed, universal banks with diversification in wholesale and retail franchises did well given that the pressure point in 2013 was the unsecured lending environment and more specifically African Bank. The concerns over unsecured lending have led to a raft of efforts to reduce exposure. Unsecured lending, which does not require any form of collateral, started out as the banking sector’s way of improving financial inclusion for citizens who could not afford collateral for loans. It proceeded to grow very fast: by more than 300% since 2007, albeit from a very low base, and by 50% quarter-on-quarter in 2012 and part of 2013. In response, the SARB raised concerns, and the value of unsecured loans fell 17% over the subsequent year, according to the National Credit Regulator (NCR), which regulates the credit industry and is tasked with policy development, investigation of complaints and enforcing the National Credit Act.

The concern proved worthwhile. In general, high margins in the sector covered high default rates among unsecured lenders. However, in August 2014, African Bank issued an advisory warning of significant losses due to bad debts. Following the announcement, its share price dropped 60% to a 20-year low and the CEO resigned. A few days later, African Bank was put under curatorship by the SARB and received a R10bn ($947m) rescue capital injection through a consortium of banks. The bank’s March 2014 interim financials reported that one-third of the R60.1bn ($5.7bn) loan book was non-performing and R1.3bn ($123m) was allocated to write-offs, while R2.5bn ($236m) was provided for general losses. Ratings agency Moody’s then downgraded African Bank to junk status in 2014.

According to Coovadia, authorities share the blame for the rapid growth in unsecured lending, as South African banks were under pressure to increase credit access. The category with the most significant growth, according to Van Wyk, had been “other loans”, which account for about 5% of total banking assets. “That category showed negative growth towards the end of 2013 and continued to do so in 2014,” he said.

Ratings Effect

Another area that will likely involve heightened scrutiny from regulators is exposure to government debt. In the wake of the African Bank bailout in August 2014 Moody’s surprised markets by downgrading South Africa’s big four banks by one notch from A3 to Baa1. The agency’s official release noted that this downgrade reflected not only on banks themselves, but also the government, citing a “lower likelihood of systemic support from South African authorities to fully protect creditors in the event of need”. Moody’s also downgraded Capitec Bank, cutting the financial strength rating of the lender to D from D+ and deposit ratings to Ba2/NP from Baa3/P-, citing concerns about its exposure to risky consumer lending. In November 2014, Moody’s then downgraded the country’s top five banks – Standard Bank, Absa, FirstRand, Nedbank and Investec Bank – by one notch again, to Baa2 (stable). The agency said the fall was “primarily due to the weakening of the South African government’s credit profile” and that the banks’ “high sovereign exposure, mainly in the form of government debt securities they hold as part of their liquid assets requirement, links their credit profile to that of the government”.

Standard & Poor’s likewise downgraded South Africa’s sovereign credit rating in June 2014, but reaffirmed its ratings of the major banks at BBB-/A-3. However, the credit rating agency did revise its banking industry country risk assessment from group 4 to 5 in its 1-to-10 scale. Konrad Reuss, managing director for South Africa and sub-Saharan Africa at Standard & Poor’s, told OBG, “The banks we cover may expect some pain from the challenging economic environment, but they should not experience distress. Margins will be pressured, but the banks can cope since they have been healthy.” Fitch said in its July 2014 release, “The major South African banks all have a strong domestic franchise, which underpins stable core earnings, sophisticated risk management, and acceptable liquidity and capitalisation.” The agency goes on to note risk factors including a weak economy and high loan concentration.

Islamic Appeal

Islamic banking has assets of $1.6trn in Africa according to some estimates, and the figure is expected to reach $5trn by 2020, catering to a forecasted Muslim population of 500m. An estimated 30% of South Africa’s 2m Muslims use Islamic banking products, while the market size is worth R12bn ($1.1bn), but products on offer are limited, and providers are exploring new Islamic products like home and car loans.

Al Baraka Bank, Barclays Africa Group, First National Bank and HBZ Bank have Islamic commercial and corporate banking products in South Africa. Al Baraka, with roughly 40,000 customers, is the only full-fledged Islamic bank, while the rest are traditional banks that offer Islamic services. There is an increasing trend of non-Muslims switching to Islamic savings products, which often yield better returns than traditional interest-bearing accounts. At Barclays Africa Group, for example, some 10% of Islamic banking clients are non-Muslims, and in 2013 average returns on the bank’s Islamic savings accounts were 2% better than conventional ones.

OF Regulation & Inclusion

After the 2008 global financial crisis, several countries, South Africa included, saw the need to create and reinforce a more stable banking system. The Basel Committee on Banking Supervision created a new banking regulation framework, Basel III, which called for more stringent capital and liquidity requirements, with a staggered implementation timeline from 2015 to 2019. The new requirements, however, are posing challenges. While overall capitalisation is not particularly problematic, the liquidity coverage ratio and the net stable funding ratio has prompted some concern. As a result, there have been a few changes proposed to the framework, including a revision of the leverage ratio framework to reduce near-term uncertainly (see analysis).

While efforts are under way to stabilise the banking system, other programmes are in the works to increase access to banking and financial services. Mobile money services, for example, are becoming increasingly popular after the success of Kenya’s MPesa initiative: mobile banking penetration in South Africa increased from 25% in 2012 to 28% in 2013, for example. Still, the majority of users are still performing very basic features with mobile banking – a habit several telecoms providers are hoping to change by rolling out their own mobile money services in South Africa (see analysis).

Other initiatives are making efforts to improve household financial awareness via financial management tools and campaigns, as well as financial planning and savings awareness campaigns.


South Africa’s banks have shown resilience through economic and cyclical challenges, and are expected to keep widening their footprint on the continent in the next few years. However, impairment levels will likely trend upwards as the higher interest rate cycle spins, and margins will be pressed. Loan growth will continue, if at low levels, while the effect of the Moody’s rating cut will weigh in, though this will be partly mitigated by other rating agencies’ reaffirmation of South African banks. In line with 2013, industry assets are expected to grow 9%, with the balance likely to shift from consumers to wholesale.