South Africa: Look Beyond Profits, Banks Warned

South African banks have recovered strongly from the fallout of the global financial crisis and are now looking to expand, both domestically and in emerging markets across the continent. Yet the government remains keen to reform the sector, both in order to guarantee long-term regulatory stability and to ensure that the country’s banks make a greater contribution to promoting domestic economic growth and social development.

Giving the keynote address at the South African Banking Association’s 2011 Banking Summit, Finance Minister Pravin Gordhan laid out the government’s plans. These included encouraging greater competition in the industry; providing access to banking services for more South Africans; introducing a more robust regulatory regime and reining in banking executive remuneration, although as elsewhere in the world, Pretoria seems reluctant to legislate on the last of these issues.

Four banks dominate the South African banking industry: Absa, First National Bank, Nedbank and Standard Bank (Stanbank). Absa is the country’s biggest retail bank with 955 branches, 11m customers and 9,000 ATMs, but Stanbank is the biggest bank by market capitalisation. According to figures from the Bank Supervision Department, the big four accounted for 84.6% of the balance sheet of South Africa’s entire banking sector at the end of 2010.

It may seem to many observers that the big four have always dominated the domestic industry, but this structure is a relatively new phenomenon. Twenty years ago, a large number of smaller banks competed for retail customers in particular, but a series of aggressive mergers and acquisitions helped to create the current elite.

For instance, Absa, otherwise known as Amalgamated Banks of South Africa, was formed in 1991 by the merger of United Building Society, Allied Bank Group and Volkskas Bank Group. One year later, the company acquired Bankfin and Trust Bank and in 2005, the UK’s Barclays Bank took a controlling stake in the company. Absa’s investment banking operations have benefited from Barclays’ support and now account for a large proportion of its total business, although some analysts have criticised the company’s performance in retail banking.

The industry’s recovery from the global financial crisis has been demonstrated by recent financial results. Nedbank, for example, announced a 28.8% increase in revenue for the first six months of this year at R2.772bn ($395.5m). The bank has increased the number of its retail primary clients by 94,000 over the past year; the number of branches and other outlets by 116; and its ATM network by
420 machines.

Chief executive Mike Brown commented: “We continue to see record transaction volume growth in electronic banking and increased net new primary client gains in the wholesale banking areas. The balance sheet remains liquid, strongly capitalised and in a good position to take advantage of growth opportunities as they arise. The group has had a positive start to the year and remains in a good position to deliver growth in 2011 earnings in excess of its medium- to long-term financial target.”

Gordhan puts the robustness of South Africa’s banking sector down to the country’s sound regulatory framework, its well-capitalised banks and the banks’ limited exposure to high risk and foreign assets. The country’s financial services sector accounts for around 10.5% of GDP and employs about 260,000 people, and so is of economic importance in its own right and not just as a facilitator of more general economic growth.

The finance minister concluded: “The domestic banking sector remains resilient in the face of volatility and turbulence in global markets, with well-capitalised and relatively profitable institutions. However, due to the interconnectedness in the global financial system, South Africa remains vigilant in order to mitigate any financial stability risks. The uncertainty of the stability of the European banking system, the European sovereign debt crisis and the recent US downgrade constitute serious downside risks.”

Planned reforms

Despite such success, the government is committed to reforming the banking sector, partly through implementing international agreements, such as Basel III and deals on remuneration for financial service employees. However, in its recent A Safer Financial Sector to Serve South Africa Better policy document, the Treasury has proposed the creation of a ‘twin peaks’ model of financial regulation. This will entail separating financial regulation: with financial institutions overseen by the South African Reserve Bank (SARB); and with the Financial Services Board (FSB) taking responsibility for the regulation of market conduct and consumer protection.

The government hopes that this division will give the regulatory system more bite in terms of tackling allegations of opaque banking fee and unfair treatment. Gordhan said: “The creation of an independent market conduct regulator within the FSB will strengthen consumer protection, particularly in the area of retail banking.” A committee comprising the FSB, SARB and National Treasury will be set up to implement the reforms.

Regulatory reform aside, the government’s main ambition for the banking industry appears to be extending access. The National Planning Commission recently stated: “For those South Africans who are excluded from the formal economy, live in informal settlements, depend on social services which are either absent or of very poor quality, the political transition is yet to translate into a better life.” The government hopes that its efforts, plus those of financial organisations, trades unions and community groups, can ensure that more people gain access to banking.

Gordhan said: “Access to banking remains a key priority … there has been improvement, but more can certainly be done. I am aware that institutions have recently undertaken innovative developments in this area. I certainly think that those can be reinforced and speeded up. Technological advances have made mobile banking solutions a reality and made it possible to have viable points of banking presence in even deep rural areas.”

The proportion of South African adults with access to banking services increased from 51% in 2006 to 63% in 2010 and the government has set a target of increasing this to 70% by 2013, pinning its hopes on the mobile banking revolution. Innovations in the sector include the so-called 1234 branches set up by Absa to provide entry-level services in communities where many people are unbanked. The four services on offer are: savings accounts, transaction accounts, loans and life insurance.

FNB now manages 100 EasyPlan branches in the country to offer services to the previously unbanked in rural areas and plans to expand its network to 150 outlets by the end of this year. EasyPlan, which has a customer base of 105,000, paid out R90m ($12.8m) in loans in May alone, with loans starting from just R250 ($35.6) to allow customers to build up a credit profile that can then be utilised with other financial services providers. The bank targets customers earning less than R100,000 ($14,268) a year, which in practice is a majority of South Africans, although it does charge a monthly banking fee of R3.95 ($0.6).

FNB chief executive Michael Jordaan said: “We have consistently grown our customer base and our book through the innovative use of technology and the development and introduction of new product. Advanced technology such as our real time cash deposit ATMs, Cellphone Banking and eWallet enable us to offer our customers quality banking at affordable rates. It is crucial that we encourage a culture of not carrying cash, as carrying cash can be expensive, especially in our market. We contribute to this by eliminating fees on point of sale purchases, ensuring that customers are able to avoid carrying cash.”

Again, as in many other countries in the world, South African banks appear to have curtailed their support for the small and medium-sized enterprise (SME) sector. The proportion of SME lending out of total lending has fallen from 16% in 2009 as a whole to 10.4% in June this year. This is probably the result of financial institutions reducing their lending to less-established or more risky ventures. The government is keen to reverse this trend but it seems that it is only the banks themselves who can achieve this.

Speaking at the end of August, Gordhan warned banks that they must not prosper at the expense of the poor. He said: “The pursuit of certain objectives, with increasing rewards as the sole tool, is a race, I suggest, to the bottom. We might also ask: where are the Warren Buffetts of South Africa; those who will say, voluntarily, ‘I have enough, I need to share for the benefit of all’?” The Minister is to hold meetings with banking industry leaders to discuss remuneration levels, plans to promote inclusive banking and also the cost of banking in South Africa.

Such views can also be found within the banking industry itself. Sim Tshabalala, the chief executive of Standard Bank South Africa,  said: “Given the scale and depth of South Africa’s problems, banks can and should do more to contribute to transformation, growth and development. It is arguable that they need to look hardest in these areas: investment in job intensive sectors, SME financing, cooperative financing, infrastructure and agriculture financing.”

New entrants

With South Africa’s big four banks firmly in control, it could be difficult to see where any competition could come from. However, companies such as African Bank, Mercantile Bank and Bidvest Bank, which lie outside the first rank of South African financial institutions, are large by African standards, and so have ambitions to take a bigger share of their domestic market. There are also a range of smaller banks, including black empowerment enterprises and foreign banks that have set up in the country since 1995.

South Africa’s Department of Communications has announced that it will turn Postbank into a mainstream bank in an effort to provide access to banking services to more South Africans. The deputy minister of communications, Obed Bapela, said: “Since the finalisation of the Postbank Act, we are moving with speed to corporatise the Postbank into a fully functional banking facility to cater for the needs of the poor. We envisage that the establishment of the Postbank will also create jobs while also contributing to local economic development.”

A very different company is also planning to expand the range of its South African operations. JPMorgan Chase & Co is to begin offering banking services to corporate clients, in addition to its existing treasury and foreign exchange services. Eric von Glehn, the managing director of JPMorgan in Johannesburg, said: “We’re broadening our products and services. We have lots of big multinationals doing business all over Africa and in South Africa and we’re in Africa so it makes enormous sense to be their partners.”

The government of South Africa is also keen to see cooperatives play a bigger role in the industry. The passing of the Cooperative Banks Act in 2007 and the formation of the Cooperative Banks Development Agency two years later have laid the groundwork for greater emphasis on cooperative banking.

Two cooperative banks have been set up since 2009 and a total of 19 applications are currently being considered. Although there are now 121 cooperatives in the financial sector as a whole in South Africa, they have just 59,000 members and R175m ($25m) in savings, so there is certainly plenty of scope for growth. Gordhan commented: “There is a need for the scaling up of cooperative financial institutions in order to absorb the high and growing demand for financial services in many of our communities.”

Mobile phone banking has not had the same impact in South Africa as in much of the rest of the continent, largely because most South Africans already have access to conventional or online banking services. Nevertheless, the fact that the mobile banking market is beginning to mature was underlined in August when Absa and mobile operator Vodacom agreed to set up a joint venture, albeit with a more sophisticated spread of services than in many other African countries.

Absa and Vodacom revealed that their joint innovations would include a ‘tap and go’ payment system; machine to machine (telemetry) solutions in the insurance sector; consumer education delivered via mobile devices; bundled mobile and financial service offerings and free Unstructured Supplementary Service Data (USSD) banking. They stated: “By working together, each company will be leveraging collective resources, expertise, infrastructure and new technologies to consistently deliver valuable services to its customers.”

A spokesperson for Absa added: “Our plan is for this system to eventually see the cellular handset become an alternative to cash and cards as payment mechanisms.” The two companies hope to use the joint venture to cross-sell products, often on a preferential basis.

Such initiatives are likely to become more common as the big four banks seek new methods of increasing their market share and profit levels. Yet it is difficult to escape the feeling that the big battles of the next decade will be fought further north, as sub-Saharan Africa begins to fulfil its economic potential, encouraging banks from around the world to stake a claim to provide financial services in dozens of new markets.