JOHANNESBURG - South Africa’s four largest banks saw fewer profits in the first half of 2017, with forensic analysis showing that profits slowed to 5.1 percent in the first six months to June.
This is the slowest increase since the global financial crisis of 2008 as the country struggles in a low economic growth environment.
The economy last grew above three percent in 2011 and was on a downhill trajectory since then.
According to the International Monitory Fund, South Africa’s economy will grow by 0.5 percent in 2017, which will directly impact on how banks perform.
An analysis of performance by major banks shows a direct correlation between economic growth and profits.
It shows that for every one percent the economy grows, bank profits rise by five percent.
Ratings agency Moody’s this week warned that banks would face headwinds over the next year but that there was sufficient capital to cushion any blows.
“If you look at the overall picture, banks’ results have been pretty good given the difficult operating environment,” Ernst & Young Financial Services Africa Leader Andy Bates said. “I think the reason the banks have managed to keep those headline earnings quite high is probably because of the quality of their lending.”
He said banking revenue grew by three percent, its lowest level in about 20 years, which in real terms means growth is negative when adjusted for inflation.
Bates said prudent lending was possibly the reason why banks had less bad debt or write-offs.
He added a new accounting standard is coming into force next year, which will change the way banks account for their loans.
“Even if the commercial reality of that loan remains the same, the way in which that is measured will actually change and therefore, we are expecting to see an upturn in impairments next year.”
Banks surprisingly managed to contain operating costs at just over two percent over the same period.
Corporate and investment banking performed strongly when compared to retail banking.
There was a 2.6 percent drop in loans as cautious banks looked to keep a tight grip on their cash - a trend seen in the banking business across the continent, as loans dwindled because of low growth and regulatory challenges.
Ernst & Young Africa Knowledge Leader Graham Thompson believes opportunities remain.
“We’ve had the oil-dependent economies like Nigeria and Angola taking strain. We’ve seen Kenya launched interest rate caps and that has impacted the banking environment fundamentally,” he added.