Cape Town - Banks are adapting fast to the digital revolution because they will be left behind by competitors who aren't even in banking if they don't.
These include telecoms such as Vodacom, who through its mobile payment system does more transactions every month in East Africa than all four of our banks put together.
Banks still often get a bad rap in this country for slow service, queues at branches and high service charges, but digital banking takes many of those problem areas out of the transaction.
As one bank executive said recently: “We are all just utilities.”
But there is a price to pay as legacy investments are wound down or reduced in scope, not to mention the need by the banks, as most other business sectors have already done, to cut costs by reducing staff and facilities due to the shrinking economy.
The planned strike by South African bank sector workers on Friday that was cancelled, after a successful interdict against trade unions by Business Unity South Africa, was a symptom of such change.
The fact is that staff numbers at banks, and their physical outlets, are likely to continue to decline steadily, as more and more customers move to digital platforms.
That was why a key aspect of Friday’s planned strike was to protest against future job cuts.
Some banks have been reducing staff and outlets already.
Consider that the number of Standard Bank employees in South Africa fell from 33 332 in 2016 to 32 876 at the end of 2017, and 32 162 by the end of 2018 - a 3.5 percent decline over two years.
At Absa Group, the number of outlets in South Africa fell 8 percent to 640 in the six months to June 30 compared with a year previously, while the number of employees in South Africa fell 5 percent to 29629 from 31317, over the same period.
At Absa, staff costs had increased 8 percent over the six-month period, well above the inflation rate, and those costs comprised a full 57 percent of the bank's operating costs.
At Nedbank Group, the R8.4 billion in salaries paid to 30577 amounted to 53 percent of operating expenses in the six months to June, 2019.
Ironically, FirstRand Group, which claims to be the most digitally innovative among the big banks, said that the number of its employees rose slightly to 37 958 in the year to June 30, from 37720 a year before.
And at Capitec, a paperless bank that lifted headline earnings 20 percent in the six months to end-August 2019, staff numbers will increase by 600 in its second half, as will its number of branches.
The bank increased the number of digital banking clients by 45 percent to 6.8 million people in the period, which is really strong growth in a quiet market.
It is for this reason no doubt, apart from double-digit earnings growth, that its share price was trading at a robust price:earnings (p:e) ratio of 25.6 on Friday after the share price had risen by 17 percent through September to trade at R1282.
The big four banks have traditionally been strong defensive shares on the JSE, with steady earnings and dividend growth, albeit in single digits these days, and good returns on equity.
Digital and growth in other African markets have been offsetting low growth in South Africa.
This remains the case, although the risks have increased. There is still no real prospect of an appreciably faster gross domestic product growth rate in the short or medium term.
Eskom too remains a risk - digital strategies aren't effective in an erratic power supply environment. New credit laws also restrict the ability of the banks to operate and gain new clients in lower income markets.
Nevertheless, Standard Bank, which operates in 20 African countries, appears undervalued given its p:e ratio is only at around 10, when compared with Capitec’s valuation. If you look at Standard’s share price over 10 years the trend may be erratic, but it is definitely up.
If one looks at Absa Group's share price over a decade, the trend, noticeably, is flat.
Its p:e was 9.08 on Friday, with the price trading at R158.50. It still has work to do on its separation from Barclays, needs to keep working on expanding its African footprint, and also needs to work on sweating its business banking book.
Nedbank Group’s share price traded at R232 on Friday. It has the lowest p:e of 8.1 among the big banks. Broadly, its 10-year share price trend was up until the end of 2018, after which it declined.
The bank is in sound shape financially though, and is working hard on building out its digital strategy. It lifted headline earnings per share only 3.5 percent to 141.11 cents in the six months to June 30, 2019, but grew clients and markets share nicely during the period.
FirstRand’s share price traded at R63.20 on Friday, on a p:e 12.7, which is undemanding, considering its continuing roll-out of digital solutions. Its ten-year share price trend is up.
If I were filling my Christmas 2019 share stocking with two of the five, I’d go for Standard and FirstRand.