Two months ago, Standard Bank CEO Jacko Maree announced to a gathering of journalists at a lunch: "There has never been a better time to be in banking."
He was right. The banking industry has had a champagne year. Consumer spending has never been as buoyant, nor appetite for debt as insatiable. And it's impossible to predict when the good times will end. As Maree pointed out, the consumer spending must eventually feed into growth in the corporate sector, so commercial borrowing should eventually take off.
Consumers still have a long way to go before they reach the limits of affordability. Total credit extended amounts to 70% of GDP; other developing countries have far higher ratios. On average, individuals in SA have debt amounting to only 55% of their gross annual income.
For investors, the banking sector has been a great performer (the table ranks the banks by profits). It recorded a 50% rise on the JSE during 2004 - gains it has marginally advanced on so far this year. Last year's performance was a good 30 percentage points ahead of the rest of the market (see graph). The star of the sector was Absa, which has the biggest retail exposure and enjoyed the boost from Barclays' takeover effort. Absa delivered a more than 70% improvement during 2004. Standard Bank followed with 60%. Investec had a boom in the last quarter but still managed only fourth position after FirstRand. Nedcor, once again, lagged behind, with just under 20% for the year.
If a commercial borrowing binge does materialise, 2005 may bring a similarly strong performance. But it is a big if. There are some concerning indicators. Wholesale spending - the buying retailers do - was up 24% year-on-year in December 2004, but dropped to 14,9% growth in January. This appears to be feeding into the manufacturing sector. Manufacturing grew by 5% in 2004, but slowed down to 3,2% in January and 2,7% in February.
But from the banks' point of view, the key measure is private-sector credit extension (PSCE), which captures most banks' lending. Those figures are healthier - there was a 17% increase in February and 15,2% in January. Growth still seems to be coming from consumers - mortgage finance showed the biggest growth (24,1%) followed by instalment credit (21,1%) and leasing finance (16,8%). The banks' figures tell a similar story: the industry as a whole has grown credit-card lending by 26,1% in the year to February; mortgages grew by 24,3%; instalment credit by 21,1%. And those figures are from before April's surprise 0,5 percentage point cut in interest rates, bringing the prime rate down to 10,5% - the lowest level since February 1981.
Business confidence, as measured by the SA Chamber of Business's confidence index, has been climbing steadily and has so far this year beaten the average for 2004. That looks good for improved corporate spending. But much of corporate SA sits on large cash balances, so can fund much future growth without recourse to the banks. Of all cash deposited in banks, 80% is corporate savings, so businesses have been funding the consumer boom. In the past five years, corporate overdrafts have declined from 35% to 26% of gross lending by the banks, according to Standard & Poor's.
Improved equity markets should also help investment banking. Once again, equity will come back in favour for companies to finance their capital. The strong recent performance of Investec reflects this most clearly.
On balance, then, it is safe to say the banking sector is on its way to a good 2005. But it will probably end up being a different sector to what it is now. Two big influences will affect the structure of the banking industry: foreign ownership and the extension of banking services to the unbanked population.
At the time of writing, Barclays' bid for Absa appeared to be on sound ground and likely to succeed.
It seemed clear that Barclays' ownership of Absa would have a big impact on the level of competition in the industry. Barclays chose Absa because it has a strong retail franchise, but is underweight in corporate and investment banking. Absa CEO Steve Booysen says the new group will search out best practice from both sides.
Barclays said it planned to add R1,4bn/year to Absa's bottom line by bringing in its corporate banking strength. Barclays' influence would first be felt in this field. Barclays' investment banking pedigree is based largely on debt structuring. That strength would help with the further development of the local bond market and remove banks from many companies' funding equations.
Barclays' influence was also expected to lead to developments in the retail space. This has clearly been Absa's strength, but the growth of the property market has increased demand to make housing finance more affordable. Barclays' experience in interest-only mortgages could help improve the sophistication of the local home loan market.
The extension of banking services means banks will be building their presence in poor communities through infrastructure development. They will also be pushing new products that appeal to the unbanked market. Both developments are in terms of the financial sector charter, which all banks are committed too. There are direct costs that the banks will have to absorb (Absa, for example, has budgeted R302m for infrastructure development this financial year).
The rollout of services to the unbanked may increase the risk of the sector as it lends to inexperienced borrowers. However, in both this and infrastructure development, the amounts involved are small and unlikely to have a significant impact on the overall performance of the banks. With prospects as good as they are, now is the time to spend on quasipolitical rather than commercial needs.
