SA’s four largest banks have been nimble in dealing with rising expenses — mainly due to changes in bank regulations — and customers who dislike going into a branch to do their business. But the pandemic may just have been the push banks needed to embrace a digital approach completely.
Sure, Capitec opted for a cheap and simple-to-use digital offering almost two decades ago. But the traditional big four — Standard Bank, FNB, Absa and Nedbank — were slower on the uptake. That’s now evident in the growth in the number of their digitally active customers.
Capitec leads the pack in terms of these numbers, with 10.1-million of its 18.1-million clients using digital channels. Second is FNB, with 6.1-million out of its 10.5-million clients. Standard Bank, Nedbank and Absa sit on between 2.2-million and 2.5-million digital clients each. Former FNB CEO Michael Jordaan’s incessant drive for digital banking has clearly stood the bank in good stead.
But the digital drive has come at a cost for the banks. For example, Nedbank’s intangible software assets peaked at R9bn in June last year and Standard Bank spent R10.1bn on IT in the six months to end-June, up 4.3% from the comparable period a year earlier. However, its higher spend belies major system outages that left businesses and consumers stranded without the ability to make payments.
“We recognise the inconvenience and frustration that our system outages have caused our clients, as well as the severe reputational and franchise damage they caused,” Standard Bank CEO Sim Tshabalala told investors at the release of the results. “The outages happened at the worst times of the day and month [at month-end], and our communication about them was poor.”
The last time there was a noticeable problem was after a period of aggressive consumer lending in the early to mid-2010s
— Liam Hechter
Yet large investments in IT are paying off: usage of ATMs and branches have declined substantially. At Nedbank, branch floor space has decreased by 69,000m2 since 2014, with 4,000m2 saved during the first half of this year alone. Branch teller activity slumped by 65% over the past three years.
Standard Bank has also shown a decline in branch floor space. The volume of branch transactions dropped 21% in the first six months to end-June compared with the same period a year earlier. The bank has cut its branch floor space by 24,000m2, or 8%, over the period.
Absa reported a decline in ATM and branch volumes of 6% in the six months to end-June from the comparable period a year earlier. The bank has shown a 1% drop in property costs (rent paid) to R895m in the six-month period.
The benefit of lower costs due to smaller branch and ATM footprints can, however, easily be offset by higher credit loss ratios among the banks — to clients defaulting on their loans.
Standard Bank’s credit loss ratio dropped six basis points (bp) to 82bp at end-June from a year earlier, while Nedbank’s ratio remained unchanged at 85bp. Absa’s credit loss ratio ticked up 3bp to 91bp at end-June.
The three banks don’t expect a large credit unwinding — when overindebted credit clients struggle to repay their debt.
“There are often concerns about SA banks’ credit cycles and nonperforming loans, given the sluggish economic environment over the past 10 years,” says Liam Hechter, an analyst at Anchor Capital. “However, the last time there was a noticeable problem, in our view, was after a period of aggressive consumer lending in the early to mid-2010s, and even that unwind was manageable.”
Still, the view is that banks are well provisioned for bad loans. Dirk Jooste, fund manager at PSG Asset Management, says: “Provisions were increased during 2018, but then accelerated over the Covid period. Subsequently, the provisions have been maintained at elevated levels given uncertain inflation, interest rate and economic growth dynamics.”
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