South Africa’s major banks stand out globally among large banks for their extraordinary profitability. A common measure of profitability been return on equity. But according to Daan Steenkamp, CEO of Codera Analytics shifts in the payment landscape are putting banks’ non-interest income under pressure that’s because the use of cash has not been growing to the same extent as other forms of payment. He joins CNBC Africa for more.
South Africa’s major banks stand out globally amongst large banks for their extraordinary profitability. A common measure of profitability been return on equity. But according to Daan Steenkamp, CEO of Codera Analytics shifts in the payment landscape are putting banks’ non-interest income under pressure that’s because the use of cash has not been growing to the same extent as other forms of payment. He joins CNBC Africa for more. Daan, thank you so much for your time. I mean, when you look at your modelling and we talk about this extraordinary profitability of banks, particularly in SA, what is it about the South African banks that makes them so profitable? Hi Nastasia, nice to be with you. So it's worth just double-clicking on what bank profitability is. So bank profitability is a function of three things. The first is interest income, then non-interest income and then lastly banks cost structure. Now, what makes South African banks really interesting is their net interest income margins are very high by global standards. So the reason this is, is because South African interest rates are relatively high and in part that reflects compensation for risk in South Africa. And then the other thing is that deposit rates are relatively low compared to what banks charge on loans. And so bank funding costs are also relatively low by global standards. Together, that means that South African banks have relatively high net interest margins and that's been helping, that's been buoying South African bank return on equity over time. The other things that have been very important are things like credit impairments and the cost structure of banks. And banks have been quite good at managing the pressures that are at bear on those components over the cycle. But of course, over the last couple of years, bank impairments and bank costs have been under some pressure. But those are the major factors that make South African banks stand out. With that said then, how do, given what you've just described, how does that then stack up when you look at supposedly, you know, banks from the US? So South African banks do stand out globally for their extraordinary profitability. As you mentioned, return on equity is a common measure of bank profitability. And in South Africa over the last decade or so, return on equity across the sectors averaged around 15 percent. Now, this is quite high. Other concentrated banking sectors like those in Australia or New Zealand have had ratios that have averaged around 12 percent over the same period. So South African return on equity for the banking sector is high by global standards. As I mentioned in the intro, we'll be talking about, obviously, the shift in the payment landscape and why they're putting so much pressure on net interest margin, especially rather net interest income as it relates to the banks. Let's talk about the note that you put out, and it's based on the modelling that you and the team put together. Talk to me about why the bank's average fees from transactions is declining. I mean, what is that a function of over the years? So there are a couple of factors. The first is that the use of cash in South Africa has not been increasing to the same extent as payments and other forms of payments. And since the pandemic specifically, the amount of cash in circulation has not been keeping up with the increases in consumer price inflation. So on the one hand, there's been a reduction in the relative use of cash in South Africa. And then on the other hand, banks' average fees from transactions have been declining as well. Now, this has been a function of greater competition amongst providers of payment services, innovation in the industry as well, and also pressure from regulators for banks to reduce interchange fees. Now, we estimate that if you look at average revenues from payments for banks, that's down 50 percent since 2016 when you compare it to inflation. So there's been a meaningful real change in average fees for banks, and that is putting pressure on non-interest income for banks. If we're seeing this displacement of cash, what does that mean for South African banks then from an opportunity point of view? Now, the revenue that banks make from payments is a function of the amount of payments that they process times the fees that they earn, the average fees they earn on those transactions. And so, as I've mentioned, the average fees that banks are earning have been under pressure. But on the other hand, the number of transactions that banks are processing have been increasing. So there's an opportunity for banks to offset some of the displacement of cash by digital streams and for them to benefit from increased transactions if they embrace other forms of payment. Now, we have seen in South Africa that GDP has become more intensive in payments. So even as the value of payments has been relatively flat compared to consumer prices, we've seen a big increase in the amount of transactions for a given level of economic activity. So what this means for banks is that there's an opportunity for them to continue to grow their revenue streams, even if the average payment fee that they collect on a payment might be under pressure or decline. So and then secondly, there's an opportunity for banks to grow their customer base. And by doing so, they can learn more about the market, collect more data about their consumers and better understand not just the market, but how they can serve their client base better. As we get to the end of the conversation, are you seeing evidence where banks are using their client data better to understand the client? I think this is a key area of competition and an area where banks are creating new value for clients by thinking about how they can harness their data to better tailor the offerings that they make available to their customers and also make value added services available. So we've seen value added services to consumers grow meaningfully over recent years. If we look at some data from Electrum and other sources, it looks like the volume of value added services has grown a lot. We estimate that it's up about 40 percent since 2021. And so we argue that that creates an opportunity for banks to partner with fintechs to make new value added services available to their existing customer base, but also grow their customer base by embracing things like digital wallets, mobile payment platforms and the like. So it does create new opportunities for banks if they if they modernize their payment infrastructure and their systems more generally. Dan, thank you so much for your time this afternoon. That is Dan Stian-Gampu is the CEO of Codera Analytics.
Theme: Adapting to the Shifting Payments Landscape for South African Banks
South Africa's major banks have long been known globally for their exceptional profitability, with return on equity being a common measure of their success. The country's high net interest income margins, fueled by relatively high interest rates and low deposit rates, have been a key factor contributing to this profitability. However, a shift in the payment landscape is now putting pressure on banks' non-interest income, particularly in the form of declining average fees from transactions. Daan Steenkamp, CEO of Codera Analytics, shed light on this issue in a recent interview with CNBC Africa. Steenkamp highlighted that the reduced usage of cash in South Africa, especially in comparison to other forms of payment, has been a significant driver behind the decline in average fees from transactions for banks. Additionally, factors such as increased competition among payment service providers, industry innovations, and regulatory pressure to lower interchange fees have further impacted banks' non-interest income. Despite these challenges, Steenkamp pointed out that there are opportunities for South African banks to adapt and thrive in the evolving payment landscape. By embracing digital payment streams and focusing on growing their customer base, banks can offset the decline in average fees and benefit from the rise in transaction volumes. This shift towards digitization presents banks with a chance to enhance their revenue streams and improve customer insights through data analytics. Moreover, Steenkamp emphasized the importance of leveraging client data to better understand and cater to the needs of customers. By harnessing data analytics and partnering with fintech companies, banks can offer value-added services and personalized solutions, ultimately creating a more tailored and efficient banking experience for clients. As South African banks navigate these changes, the key to maintaining profitability lies in their ability to adapt to digital advancements, enhance their payment infrastructure, and collaborate with innovative partners. By embracing innovation and customer-centric strategies, banks can not only mitigate the challenges posed by the shifting payments landscape but also unlock new growth opportunities in the competitive financial sector.
"The revenue that banks make from payments is a function of the amount of transactions that they process times the fees that they earn, the average fees they earn on those transactions."
South African Banks, Payment Landscape, Profitability, Banking Sector, Digital Payments, Data Analytics, Fintech, Innovation