Banks in Africa generally and in South Africa especially weathered the perfect storm caused by the COVID-19 pandemic.
This is testament to their resilience and confirms the findings of a study that was commissioned in 2015 by the African Development Bank titled, “The Banking System in Africa: Main Facts and Challenges”. The report found that while Africa’s banking environment is relatively shallow and less penetrated, it is as competitive as that in other developing and high-income regions.
- Banks in Africa showed their resilience when they weathered the existential threat and headwinds brought on by COVID.
- Banking in Africa is significantly ahead if the rest f the world according to the AFDB in terms of the penetration and adoption of mobile banking.
- Banks in South Africa especially have been making money as the economy shed off its last vestiges of COVID controls.
The continent has made improvements in banking technology and innovation, and in some cases, has leap-frogged ahead of other regions particularly in mobile banking. In terms of regulations, banks in Africa are well regulated with competition and entry regulations on par with standards in other major regions.
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If the findings by the AfDB are anything to go by it would be a hard sell to convince stakeholders that banks in Africa somehow face an existential threat. How the same banks weathered the COVID-19 shocks shows that the banking industry in Africa is made of sterner stuff. In March 2022, banks in South Africa reported their financial performance for FY2021 and their results were robust right across the board. The combined headline earnings for the banking industry in South Africa alone was 99 percent higher than what the financial institutions had reported in 2020. What this means is that all the banks in South Africa collectively doubled their profits from the previous year. Prescient analysts looking to question this feat would concede that the headline earnings metric would be high because it came off a low base where there was little economic activity in 2020. Granted. This is a fair point. However, September is reporting season for the main banks in South Africa and the financial institutions have continued to record strong earnings.
The financial results that banking institutions are reporting are for the first six months of 2022. The Johannesburg Stock Exchange banking bellwether, Standard bank Group which is the biggest bank in Africa by assets reported its earnings earlier in August 2022 said that its headline earnings grew by 33 percent. This strong performance by the banking behemoth resulted in a return on equity of 15.3 percent and resulted in an interim dividend pay-out which was 43 percent higher than the last declared dividend. The financial performance of the bank was especially robust because of the removal of the remaining COVID-19 restrictions. This led to revenue growth for the bank growing much faster than what had been anticipated. “A larger client base with increased transactional activity, strong trading performance and growth in Standard Bank’s lending book saw the bank’s non-interest revenue grow by 13 percent and net interest income rise by 15 percent. The bank’s overall revenue went up by 14 percent .” The bank said.
Standard Bank’s performance for the first six months of the 2022 financial year is consistent with the finding of a PWC report which covered the state of the banking industry in South Africa in March 2022. The resurgence of the banking industry in South Africa and in Africa is because of supportive economic conditions as well as an improved credit cycle. When banks start to feel optimistic about the future, they reduce their loan loss provisions in their books.
- Demand for banking and credit products have pleasantly surprised banking executives as economies open up.
- Standard Bank Group which is Africa’s largest Banking institution by assets reported a 33% increase in profits.
- Banking institutions as economies recover from the pandemic and resulting headwinds have begun to reduce loan loss provisions which signifies improved optimism and confidence in the future.
- Improved credit performance and increased client transactional activity has given steam bank profitability.
What this does is that banks lend more to clients than they would if they were pessimistic about the future. A loan loss provision is an income statement expense set aside as an allowance for uncollected loans and loan payments. This provision is used to cover different kinds of loan losses such as non-performing loans, customer bankruptcy, and renegotiated loans that incur lower-than-previously-estimated payments. Reducing these provisions means that banks can lend more aggressively to their clients.
This reduction in loan loss provisions should not be interpreted by investors and stakeholders to mean that banks across the continent will, going forward, completely dispense with risk management where their loan books are concerned. There are still active controls against the risk of defaulting clients; however, generally banks are now more comfortable lending than they were during 2020 and at the beginning of 2021. Now in 2022 with the opening of economies through the abolition of COVID-19 restrictions, banks in Africa are experiencing increased demand for their loan products and transactional services.
Secondly bank results for the first half of 2022 reflect positive credit performance, heightened or increased client transactional activity which combined to produce the resilience that the sector experienced in operating profit growth. Revenues enjoyed strong contribution from broader financial services in addition to financial services like insurance and asset management in terms of non-interest income. Credit quality is on the rise and is characterized by declining non-performing loans. The evidence of this according to the report are the efforts to collect on debts, improving client repayments and what the report calls the migration of credit to lower bands. Banks will continue to focus on and invest in digital banking capabilities resulting in positive client satisfaction scores and experience sentiment.
These are some of the features that have made banks in Africa resilient in the face of the headwinds caused by the COVID-19 pandemic. It must be noted that banks in Africa, like those in the rest of the world operate in an environment that is dynamic and in a constant state of flux. The economic environment globally can be best summed up using the phrase coined by the US military, VUCA. The global economic environment presently is volatile, uncertain, complex, and ambiguous. The prevailing uncertainty in the global economy will have an impact on African banks and test their resilience once again. The world had scarcely gotten past the two-year economic slump caused by COVID-19 when Russia invaded Ukraine in February 2022 in a conflict whose impact has gone much further than the vicinity of these European countries.
The conflict has caused inflation through increases in food and energy. To mitigate this, central banks across the world have announced sweeping interest rate increases. Interest rates are the price a person or firm pays to borrow money. In other words, interest is the price of money. Announcements by central banks to increase interest rates effectively raise the price of money. Banks and other financial institutions deal in money. When the price of a good or a service increases the basic premise of economic thought teaches that demand for goods or service should reduce. This means that given the context of rising interest rates, growing banking revenues and earnings is not sustainable. This development will reflect in the books of the banks when they report their full year earnings in March 2023.
Rising interest rates increase the likelihood of non-performing loans on bank books which reduces their profitability. A nonperforming loan (NPL) is a loan that is in default because the borrower has not made the scheduled payments for a specified period.
Not only is the price of money more expensive now than it was in 2021, the context in which banks are doing business is now vastly different from what it was a year ago. The largest economies in the world like the US, UK, Europe, and China have reported slowing economic growth. All of these are significant trading partners with Africa. This creates an inexorable link between their fortunes and Africa’s overall economic fortunes. This is specifically the case with China. The Asian country is Africa’s biggest trading partner. A slowdown in that country will invariably lead to reduced economic activity on the African continent. Banking institutions butter their bread from supporting economic activity. A slowdown of the same will translate into reduced earnings naturally.