Numbers Don’t Lie

Numbers Don’t Lie

By Charndré Emma Kippie

This past year, all monetary, fiscal and regulatory officials have taken the necessary steps to mitigate the effects of Covid–19 on the South African economy. As a result of the pressures created by the global pandemic, top priority became providing financial assistance to businesses, organisations and employees, as well as lowering the regulatory burden on financial institutions. All steps taken were geared towards bolstering economic activity.

In January 2021, the National Treasury and the Reserve Bank finalised the Financial Stability Framework that defines how the Reserve Bank will independently fulfil its financial stability responsibilities in terms of the Financial Sector Regulation Act (2017).

COURSE OF ACTION

In order to drive the financial sector during Covid, South Africa’s Prudential Authority – which regulates banks and the broader financial sector – instated an interim relaxation of regulations to ease the pressures which businesses and regulated financial institutions faced. The course of action included:

• Limiting the minimum capital and liquidity coverage ratio requirements for banks.

• Decreasing capital requirements for loans that banks restructured to assist their customers and guiding banks on the application of expected credit loss provisioning and accounting practices.

• Advising banks to refrain from paying bonuses and dividends.

• Paying close attention to banks’ operational risk and business continuity to ensure the health and safety of staff and customers.

• Extending financial and regulatory reporting timelines for financial institutions affected by strict lockdown restrictions.

SA witnessed significant growth, in terms of its gross domestic product (GDP) during the second quarter of 2021. The GDP accelerated marginally from a revised 1.0% (4.2% annualised) in the first quarter of 2021 to 1.2% (4.7% annualised) in the second quarter, despite the strain of the third wave of Covid-19.

Additionally, our nation’s trade surplus grew substantially in the second quarter of 2021 — this was a record high.

SOURCES treasury.gov.za resbank.co.za jse.co.za pwc.co.za iol.co.za

THE JOHANNESBURG STOCK EXCHANGE (JSE)

Numbers don't lie. And what is a given, is the fact that the JSE is the 'engine room' of the South African economy. To this day, the JSE remains one of the world's 20 largest exchanges by market capitalisation. Many of South Africa's market challenges are not new, yet it has been a great place to invest over the very long term.

The JSE was established in 1887, a period marked by the Witwatersrand Gold Rush. Due to the existence of a firm demand for capital- linked with a simple, cheap and permissive listings process, driving its initial rapid growth- more than 300 companies listed within its initial three years.

Today, the JSE consists of around 346 listed companies, and more than 800 Securities are currently available on the JSE equity market.

BANKING SECTOR

South Africa’s major banks have experienced an acute earnings recovery during the first half of 2021 — from the weakened Covid-19 related trading conditions of 2020. Thankfully, banks remain hopeful as recovery is still under way.

One of the most impactful drivers of South Africa’s earnings growth, in 2021, was the lowered credit impairment charges across most lending portfolios, as well as the customer segments acknowledged after credit conditions began to recover during the first half of the year. The provisioning made back in the 2020 financial year, also stood us in good stead.

Additionally, the country witnessed record commodity prices, which supported our corporate earnings across many major industries, and in turn, our loan performances within our major banks’ wholesale credit portfolios.

NEW TRENDS

Adopting a client-focused digital banking strategy

An intermediate challenge for banking in an increasingly cutthroat environment is enhancing customer relevance. As investments in IT architectures, digital platforms, data and automation continue, major banks have gained insights from the Covid-19 crisis and highlighted their ambitions to transform the manner in which products and services are delivered. They’ve created an ecosystem by connecting customers to partners, fintech and other providers through open architecture, part of the delivery model, by providing end-to-end services in addition to the underlying financial transactions A variety of operational models are emerging, from outsourcing elements to developing new strategic delivery partners.

ESG issues prioritised

The perception of value and risk by board members, investors, customers and regulators is changing, and environmental, social and governance (ESG) issues are quickly moving to the agenda. The thinking goes beyond climate-related disclosures and reports of ESG guidelines. The current focus is the need for compelling ESG strategies and appropriate markers to measure performance. While these topics are cross-industry, major banks acknowledge the transforming dynamics and the significance of these areas.

INDUSTRY OVERVIEW AND MACROECONOMIC DEVELOPMENTS

Combined Headline Earnings Growth ↑ 177%

Return on Equity ↑ 15.4%

Combined Common Equity Tier 1 Ratio ↑ 13,2%

Net Interest Margin ↑ 403 bps

Credit Loss Ratio ↓ 65% (down to 82bps)

Cost-to-income Ratio ↑ 55.9%