Foreign banks to hire; local banks to fire

Foreign banks operating in South Africa will increase their workforce by 25 percent over the next three years, in contrast to domestic banks, which are expected to reduce their workforce by 5 percent over the same period.

These are among the findings of the fifth PricewaterhouseCoopers survey of banking in South Africa.

Survey participants range from small foreign bank operations to the Big Four, including universal banks and specialised niche players. Issues cover areas such as Internet banking, micro-lending and capital markets.

"The survey," says PwC`s Tom Winterboer, "attempts to pull together opinions and views from these diverse parts of South African banking to provide insights into this changing environment and the banks` future directions."

It is based on interviews with managing directors and senior executives of 30 banks, 16 of which are foreign-owned and 14 of which are domestically owned.

The interviews were conducted in Johannesburg and Cape Town during February and March 2000.

The respondents identified four important trends in the South African banking market:

Continued merger and consolidation activity at both the top and bottom ends of the market.

Further impact from globalisation, with foreign players increasing competition and expanding product offerings and domestic players growing internationally.

Further exchange control deregulation, resulting in new opportunities. The new Banks Act and Regulations is considered favourable from a foreign bank`s perspective.

E-commerce will cause dramatic marketplace change and new bank efforts will expand services to the previously unbanked market.

Statistical highlights from the report include:

The 30 banks employ almost 129 000 people but this number will decline by 5 percent over the next three years. In contrast, the 16 foreign banks currently employing 2 158 people will see a 25 percent increase. Assets will grow by 45 percent over the next three years to R1,25 trillion. Qualifying capital will expand by 50 percent to almost R100 billion.

The Big Four banks account for two-thirds of all banks` qualifying capital. Internet customers will grow by 236 percent to 1,4 million in 2003 while telephone customers will expand by 200 percent to 1,26 million. Unit trust holders will increase by 32 percent to 2,8 million.

Eleven banks account for over 25 million customers and this total will reach 33 million by 2003.

Corporate accounts will grow to 115 000 by 2003.

Six banks predict their retail brokerage accounts will expand 127 percent to 150 000 in three years.

Affluent private banking clients (with invested assets exceeding R7 million), a market that is increasingly cited as a key target for both domestic and foreign banks, is anticipated to almost double to 36 000 by 2003.

"The retail banking market is undergoing rapid adjustment," notes PwC`s Brian Metcalfe, "with almost 75 percent of the banks surveyed undergoing significant or fundamental change." Internet banking has been actively examined by ABSA, FirstRand, Nedcor and Standard Bank ("The Big Four") and three of these noted that they had made fundamental changes in strategy.

The investment and merchant banking market has the highest level of competition, with 25 of the 30 banks describing it as "intensely competitive".

Private banking opportunities are attracting the attention of more banks and 11 banks are addressing their strategy in this niche market.

Asset management crosses beyond banking boundaries and 19 of the 22 banks to have commented on this area viewed it as "intensely competitive".

The micro-lending market is experiencing only moderate levels of competition amongst the banks surveyed, but six banks said they had made significant or fundamental changes to their strategy in relation to this market.

The three major drivers of change in the marketplace are technology, mergers and acquisitions, and globalisation. The rate of change is expected to accelerate over the next three years. By 2003, half of the banks interviewed expect very significant change to be occurring in the banking market.

The impact of technology on banking today and three years hence was demonstrated by the banks` selection of IT development and the Internet as the two most important factors. While new entrants from within the financial sector are considered very important today, the banks believe new entrants from outside the sector will become a major factor in three years.

In keeping with previous PricewaterhouseCoopers surveys in the banking market, the greatest barrier to change is the availability of skilled personnel. It therefore makes perfect sense that 90 percent of the banks have identified New Information Technology as the greatest enabler of change.

The banks are assisted in harnessing new technological opportunities by the increasing sophistication of their customers in both the retail and wholesale sectors.

The most pressing issues facing the banks at present are the increasing levels of competition and their need to maintain service quality levels. The need to understand and stay close to the customer, defined as "Client Focus", occupied third place. The domestic banks attach great importance to the successful introduction of new technology.

When confronted with a three-stage evolutionary model of customer acquisition and management, Metcalfe says it is clear that most of the domestic banks, with their broad market base, feel that they are in Stage One.

"In this stage, the goals include obtaining more value from higher-value customers, migrating low-value customers to lower self-service channels and increasing cross-selling," says Metcalfe.

Stage Three, which remains in the distance for most participating banks, results in the emergence of a customer-focussed organisational structure and skills set.

In their assessment of success, the banks place major importance on Image and Reputation. This factor ranked ahead of Return on Capital, Asset Quality and Client Retention. The foreign banks contrasted with the overall group by placing Revenue Growth in the top position.

New entrants from outside the financial services sector are expected to arrive in the market over the next three years. These players will include retailers, professional firms and software companies.

The banks regard the market as overcrowded and expect the resultant shakeout to impact three groups:

The international banks that will retreat to key segments;

The large domestic banks that will be forced to merge; and

The small boutique banks that will be acquired.

More domestic mergers and acquisitions are forecast and there will be increased emphasis on strategic alliances.

While the majority of banks believe one-stop financial services delivery is logical, almost one third disagree. Some banks acknowledge that product breadth reduces client focus and makes it hard to maintain satisfactory service quality levels.

Three quarters of banks agree with the concept of bancassurance in the South African market.

The banks project that they will spend over $1 billion annually on IT, producing a cumulative estimate of $3,7 billion over three years. The foreign banks make up just $62 million of this total, with the Big Four accounting for $3,35 billion, or 92 percent, of the domestic bank total. Over a third of this amount will be spent in the Retail and Internet banking sector.

The banks are actively trying to switch customers to electronic channels. This is true in both the retail and wholesale sectors. Telephone banking is expected to increase in importance over the next three years and the Big Four envisage significant expansion in their call centres.

The trend towards outsourcing, prevalent in other banking markets, does not appear to be as widely accepted in South Africa. A major impediment relates to a loss of control in relation to customer service.

The most common area for outsourcing is information technology and this will continue to be the case in the near future. Several banks expressed an interest in insourcing by providing related services to other financial institutions.

The banks have experienced varying degrees of success across 20 different market segments. The markets where the foreign banks have performed best are Stock Brokerage, Foreign Exchange, Private Banking, Capital Markets, Corporate and Commercial Lending, Treasury, and Mergers and Acquisitions.

The domestic banks show some variations relative to the foreign bank sector. The markets in which domestic banks have performed best include Foreign Exchange and Treasury, but also comprise Structured Finance - both tax and projects - Retail Lending and Unit Trusts.

In terms of market successes, the Big Four mirror their smaller domestic counterparts, with a few notable exceptions. For example, they believe that they have been moderately successful in the rollout of Internet banking.

Profit expectations over the last three years have been, on the whole, "as expected" for Retail Banking, Internet Banking, Credit Cards, Life Insurance and Private Banking, and "greater than expected" in Micro-lending and Investment and Merchant Banking. Asset Management appears to have been a less rewarding area for the banks.

Private banking has become a new area of market development for many banks and some of the foreign banks forecast new opportunities with the continuing relaxation of exchange controls.

Collectively, the most important markets for the banks over the next three years will be Treasury, Mergers and Acquisitions, and Capital Markets. The least attractive markets will be Vehicle Financing, Mortgages and Insurance.

However, these overall directions mask the specific objectives and goals of individual banks. For example, four foreign banks plan to place major emphasis on Internet Banking over the next three years.

As found in previous PricewaterhouseCoopers surveys, the banks continue to place great importance on the continued "Stability of Central Government". Ranked in second place overall but in first place for the domestic banks was "Recruitment". "Reserve Bank Independence" continues to be strongly emphasised by all banks and, in particular, by the foreign banks.

The survey tabulates the top-ranked bank in each category based on peer ranking.