Earnings have kept rising despite some scepticism about the ability of retail banks to continue their stellar performance at a time of rising debt and interest rates. Bad debts increased slightly, but this was expected and credit quality remains strong. Banks have navigated a benign environment in recent years and managed risks in anticipation of more testing times.

The current year is expected to produce more mishaps from over-extended borrowers, but no bank seems particularly worried that this will hit results significantly, despite continued growth in areas such as credit cards, where consumers usually first default on repayments.

Investment banking has come to the fore with the long-awaited government infrastructural expenditure starting to take place and corporate spending on the rise as companies realise that economic growth is set to continue. The expectation of growth has triggered a spurt of new factory construction and an expansion of manufacturing capacity, which is good for banks. The continued focus on BEE, the private equity splurge and greater merger and acquisition activity have also boosted investment banking.

However, the current year is not without its challenges. The introduction of the National Credit Act (NCA) in June has led to big changes in administrative systems and forced banks to reassess their lending practices. The concept of reckless lending as defined in the NCA means banks will have to be more wary about who they lend to and how much they lend. However, the impact of altered interest-rate limits is expected to be minimal for banks.

The NCA comes at a time of greater compliance requirements and a more tightly controlled regulatory environment, which add to the costs of being a bank. The introduction of Basel 2 in 2008, which all the banks say they are ready for, has also had an impact on costs as systems and procedures will have to change.

The competition commission's investigation into banks' competitive practices will take up more management time as they try to ward off an attack on their high fees, among other things. Many have lowered some fees but pressure for a more concerted effort to reduce the cost of banking to customers will be maintained.

With the help of the bank-friendly environment, Nedbank has shown its turnaround programme is working while market share is "stabilising". Its below par retail bank is picking up with a repositioning of its brand, a bigger marketing budget and announced improvements to its distribution network based on new branches and more ATMs.

At a presentation of its results to December, Nedbank retail head Rob Shuter said he believed the retail bank was out of recovery mode and into a growth phase.

The investment bank, Nedbank Capital, also picked up business in an aggressive market where margins are being squeezed. It was recently awarded The Banker magazine's Deals of the Year Award for SA and Africa.

Nedbank Corporate, traditionally Nedbank's largest contributor to earnings, is expected to continue showing good growth. It plans to focus on gaining new primary banking clients.

CE Tom Boardman said the focus for 2007 is to improve client service, the regulatory environment, and managing the credit cycle and the bank's capital. It is on track to meet financial targets. Its quarterly results announced in May showed return on equity of 20,4% and an efficiency ratio of 53,3% - ahead of full-year 2007 targets of 20% and 55% respectively.

With the Absa/Barclays transaction now two years old, Absa disclosed in its latest results to December the extent of the synergy benefits which have been achieved. At the time of the transaction, the group announced that it would derive R1,4bn profit before tax a year after four years. In 2006, it realised R753m, ahead of a R300m target.

Some of Barclays' methods have been introduced and are particularly evident in what is now called Absa Capital, the investment banking arm, which has benefited from Barclays' global presence and expertise. Barclays influence is also evident in the card division, which experienced an increase in market share. It recently launched the almost generic Barclaycard.

Absa's purchase of Barclays' African operations has taken time, but Absa says finalisation of the deal is a priority.

Absa's strongest franchise, its retail bank, maintained market share in the face of strong competition.

CE Steve Booysen says challenges for the current year include increased household indebtedness, legislative changes and competition issues. Compliance initiatives and the implementation of Basel 2 will also have an impact. He says Absa will continue to focus on growth, but with prudence, as well as the optimisation of its balance sheet, leveraging off global capabilities and encouraging a savings and investment culture among spendthrift South Africans.

Standard Bank's strategy of moving into other emerging markets, with a new emphasis on retail banking outside of Africa, is slowly taking shape. Its purchase of Bank of America's BankBoston in Argentina was finalised earlier this year, after it had been running the bank for a year. And its acquisition of IBTC Chartered in Nigeria and the approval of its merger with Standard Bank Nigeria is nearing conclusion. It has recently done deals, subject to regulatory approval, in Turkey and Kenya.

Greater focus on its African operations is expected to increase their performance. In Africa, Standard aims to improve service levels and close gaps in product offerings such as home loans, business banking term loans and Internet banking.

At home, Standard's overall personal & business banking performance exceeded expectations and the bank said in its presentation of results to end December that it is well positioned to deal with the changing environment. Challenges mentioned include increasing consumerism, competition from nonbanks such as retailers, crime, and land expropriation in the agricultural sector.

On the investment banking side, the most noticeable feature was the growing scale of its operations globally and a focus on further improving management teams in all areas.

FirstRand's retail bank, First National Bank (FNB) also continued its growth in consumer and commercial activity, distinguishing itself by a continual launch of new products and alliances. FirstRand's investment bank, Rand Merchant Bank (RMB), continued to excel against strong competition, with all its portfolios growing strongly. Profits before tax were dominated by private equity. RMB is well positioned to take advantage of BEE transactions, infrastructure spend and corporate activity.

All four big banks have anticipated the environment well and are growing in most areas. Another round of good results is in the pipeline, though a slight slowdown in the performance of retail banking could take place. Bankers says they are more cautious than they were last year. But that's what they're expected to say.