The Competition Tribunal has dismissed applications and objections brought by several local and foreign banks to escape prosecution in an ongoing case probing alleged currency manipulation. Roy Havemann, CEO of Intellidex South Africa, discusses the implications of the Tribunal’s decision.


The Africa Climate Foundation recently held a webinar that included speakers from Intellidex: Peter Attard Montalto, Zoheb Khan and Jana van Deventer.

South Africa’s energy transition involves the decommissioning of its highly polluting, centralised energy system (what we are transitioning out of) and the creation of a new green economy powered by renewable energy (what we are transitioning into). This transition has implications for patterns of ownership and employment.

Who gains, and who loses, is a social justice issue. Thousands of livelihoods depend on the coal sector – how can these livelihoods be protected? And how can an inclusive green economy be built? What roles can the private sector play – in particular to fund this?

These questions are investigated in the second of three reports ‘Funding social justice in the energy transition’ released by the African Climate Foundation (ACF) and produced by Intellidex. This webinar looks to unpack these questions through a financing lens.

See the presentation here:

Intellidex_ACF_JET funding at scale_29 March 2023


The investor relations function in listed companies is critical in a crisis. When everything is going right and share prices are appreciating, investors are happy. But when it goes wrong and they demand answers, an investor relations team has to be ready to deliver.

Intellidex released the results of the second annual investor relations awards on Friday. It is based on a survey of 130 institutional investors and professional analysts regarding their experience of the investor relations of JSE-listed businesses. The research identifies companies that excel and those that investors say need to improve. The headlines were that Absa, Nedbank and Growthpoint ranked top in the overall awards (in that order). But there were interesting findings in other parts of the survey too.

One that stood out was Transaction Capital, which for a second year ranked first for “most accessible senior management”. As the survey research was undertaken from November to February 7, Transaction Capital’s recent earnings disappointment, which led to a sharp fall in the share price, occurred after the study period. The obvious question is to what extent its reputation among shareholders for accessible management helped soften the market reaction to bad news.

Speaking at an the awards event on Friday, Transaction Capital investor relations head Nomonde Xulu said her team worked flat out to respond to every inquiry received. She said that due to the company’s reputation there was a level of trust that was important in communicating with the market, which while disappointed could at least access the information needed to make sense of performance.

As one respondent in the survey commented, “The good [investor relations] teams will be available specifically around bad news to try to dissect it for investors. Horrible IRs or teams that have a lot to worry about will just bury their heads in the sand.”

Large-caps tend to dominate the airwaves and get the most investor attention, so the investor relations function at small and midcaps must work to build investor interest.

The small-caps rankings were led by former heavyweight Murray and & Roberts, which has faced intense pressure amid a construction industry slump. Also in the top three were gas developer Renergen and Dipula Income Fund, a real estate investment trust (Reit). For these companies, standing out among much larger peers is an achievement on its own.

Among midcaps, resources company Afrimat, Vukile Property Fund and Transaction Capital took top honours. Afrimat was also notable for beating the much larger mining majors to rank top in that sector.

The companies that investors thought needed to improve include Capitec, Dis-Chem, Coronation Fund Managers and Fortress Reit. Capitec also surprised the market with weaker-than-expected earnings announced shortly before the research period.

One analyst commented, “Historically Capitec hasn’t had a particularly well-established IR function and as long as they were beating market expectations that wasn’t a huge problem. But their results for the six months to August 31 2022 missed market consensus, yet they believed that they hadn’t underdelivered.

“The market took a bit of umbrage to that, and indicated that it was incumbent on Capitec to become a bit more institutionalised and provide more information. That I think was the genesis of the problem.”

Capitec has historically had senior executives in finance and treasury functions engage directly with investors, but when the market felt it was getting bad news it wanted a dedicated investor relations function. Other companies mentioned had all had some level of bruising encounter with shareholders, whether it was about remuneration policies or, in the case of Fortress, losing its Reit status.

Almost all respondents said investor relations was important or very important when assessing potential investments. Max Gebhardt, MD of FTI Consulting, which sponsored the awards event, says the role of investor relations practitioners is becoming increasingly complex as they have to explain company policies across a variety of measurables that investors are demanding. “Both investors and legislators are demanding more insight and information from C-suites every year. IR is there to facilitate this,” he says.

By shining a spotlight on the investor relations sector and the increased transparency it brings, this survey will help practitioners fulfil the important role they play in enabling investors to make informed decisions.

Category winners

• Dr Stuart Theobald is chair of research-led consultancy Intellidex. This article first appeared in Business Day.

MD at Intellidex, Peter Attard Montalto discusses his personal money habits and his long career working in the financial sector in an episode of Other People’s Money.

He has a broad experience working with emerging markets across Africa, Europe and Middle East over his career but a particularly in-depth and long standing concentration on South Africa, researching the country’s economy, markets and politics.

He advises a wide range of foreign and local investors, from pension funds to hedge funds and companies currently active or considering gaining a presence in South Africa, as well as foreign and local banks about the risks and opportunities within the country.

Montalto has had a long history of employment in the banking sector, having worked for the Japanese bank, Nomura.

Environmental, social and governance (ESG) imperatives have become fundamental to how businesses make investment decisions. 

According to the first Sanlam ESG Barometer survey, researched by Intellidex, there are two equally important reasons why organisations have ESG strategies: to achieve a positive impact in society and to attract investors. The latter, however, seems to carry more weight than suggested. More than 40% of survey respondents identified investors as the most highly valued stakeholders for strategic input into ESG strategies.  

While South African businesses can become more attractive for foreign investors by effectively implementing ESG in business strategy, organisations need to demonstrate to investors how their actions go beyond ESG risk management to achieve positive social or environmental impact through investing in ESG opportunities.  

The Sanlam ESG Barometer in partnership with Business Day is the first to assess how JSE-listed companies are actively improving environmental and social outcomes in society through their activities. 

Download the report here.  

The government has had a torrid time in the past five years trying to turn the infrastructure tanker. While there has been some change, it’s been slow. The Infrastructure Fund is a positive example but it too encountered the long-standing problems of project ill-preparedness or a lack of bankability. The investment and infrastructure office in the presidency clearly hasn’t delivered on its mandate to decisively shift infrastructure to a new level.

The data on infrastructure is instructive. The government has trumpeted that spending has turned around in recent years. We have seen nominal spending of R255bn in the current fiscal year, 36% above (pre-Covid-19) 2019/2020. That is after it dropped about 20% from 2015/2016 to 2020/2021. Spending is now back above that level, which sounds like a good news story. But there are some issues, as seen in the accompanying graphs.

The “price” (or deflator) of infrastructure spending as per Stats SA data is actually 38% higher in the past fiscal year compared with 2015/2016. However, in real terms, infrastructure spending is actually about 30% lower. Real terms is what counts — the number of infrastructure projects (bridges, pipes and roads) that are completed is all that matters.

In real terms, spending is expected to even be a touch lower in the coming fiscal year as the National Treasury pulls back on underspending. While it is expected to grow further in 2025/2026 it is still likely to be about 20% lower than in 2015/2016 in real terms.

Much of the 2025/2026 increase is down to a focus on energy investments including solar panels on government buildings and social housing. That’s positive, but strip out energy and look at “other” infrastructure, and the picture is quite a lot worse, with a much more gradual rise in real infrastructure spending.

Infrastructure spending may well be turning a corner, but it’s from a far lower base than many people realise.

Tease mining

There are many related gems in the latest GDP data for the fourth quarter. Investment, it turns out, is a rather more complex story than the headline 4.7% real growth of fixed capital investment in 2022. Even though that was the highest since 2013, the total amount of investment is still about 17% lower than that year. Transport and machinery were the main supporting pillars.

However, all is not well below the surface. A question I like to tease the mining sector with is, “is SA actually a mining country?”

The GDP data shows that mining exploration was down 9.7% in real terms last year — while there is supposed to be a boom in strategic minerals for the just energy transition, a global terms-of-trade cycle, and demand for coal amid the fallout from the war in Ukraine.

And it gets worse: mining exploration spend in real terms has shrunk sharply in eight of the past 10 years. The amount SA is spending on mining exploration now is just 28% of that a decade ago. That is bonkers, and it will define the shape of the industry for many years.

The reasons are well understood and often rehearsed in these pages, but it boils down to mining simply not being a priority — and that won’t change until there’s a shift in leadership in that area of government; one that understands the complexities of a modern mining economy and, in particular, the security issues now at play. There is little point talking about beneficiation when so little stuff is coming out of the ground to beneficiate.

Research & development (R&D) spending by the private sector (again in real terms) is down 4.8% on the previous year, making it six years of contraction. That same measure averaged 10.6% growth annually from 2002-2007 before the global financial crisis and the Zuma administration. Now, the same amount is being spent in real terms as in the late 1990s, or half as much as the recent peak of spending in 2016.

Mining exploration

The question then, is where will future total factor productivity (TFP) come from if R&D spending is falling, infrastructure spending is sluggish and exploration is weak (not to mention many other factors)? TFP growth for the coming 20 years is built into the investment choices to be made in the next few years. Looking past the Covid-19 wobble, TFP has been shrinking since at least 2016.

It is an issue that’s apparently being ignored. If SA substantively solves load-shedding in the next few years (which is possible though certainly not easy) — and investment in new energy sources and associated matters such as transmission increases — will TFP rise? Perhaps to some extent initially, but we may well encounter other limiting factors such as the lack of mining exploration in recent years and the lack of infrastructure investment. Then there is the skilled immigration visa issue and education; not to mention the train smash that is Transnet.

The takeaway perhaps is this: SA can see something of a small boom between, say, 2025 and 2030 if load-shedding is solved, but will quickly encounter other limiting factors that needs to be solved now — the logistics industry and its reform, visas, a conducive environment for mining exploration and nonenergy infrastructure investments.

There is always something that needs a solution and reform in the short term.

• Attard Montalto leads on political economy, markets and the just energy transition at Intellidex, an SA research-led consulting company. This article first appeared in Business Day.

The Top Investor Relations Awards are a critical barometer of the quality of the investor relations function at JSE-listed companies. It has already become a vital resource for IR teams to understand market feedback.

An in person event was held on 24 March 2023 at the Marriott Hotel in Melrose. The results were as follows:

Top Rated Overall

Absa Group

Top Rated Financial Services

Absa Group

Top Rated Consumer Services

Mr Price Group

Top Rated Industrial Sector

Growthpoint Properties

Top Rated Resources Sector


Top Rated Large Cap

Absa Group

Top Rated Mid Cap

Transaction Capital

Top Rated Small Cap

Murray & Roberts Holdings

Top Rated – Most Accessible Senior Management

Transaction Capital

Top Rated – Best Integrated Annual Report

Transaction Capital

Top Rated – Best Market Communications

Nedbank Group

Top Rated – Best Integrated Annual Report 

Nedbank Group

Download the report here:

Intellidex is proud to announce the second of three reports on scaling private sector financing for South Africa’s JET, commissioned by the African Climate Foundation. Our first report titled Financing South Africa’s Just Energy Transition investigated various aspects of private financing for JET.

In the second report we explore how private capital can be deployed to fund activities, interventions and programmes that promote social justice in South Africa’s energy transition. We introduce the concept of “transition in” and “transition out”, explore the types of interventions that are required and how the private sector can fund these interventions.

South Africa’s energy transition involves the decommissioning of its highly polluting, centralised energy system (what we are transitioning out of) and the creation of a new green economy powered by renewable energy (what we are transitioning into). This transition has implications for patterns of ownership and employment. Who gains, and who loses, is a social justice issue. Thousands of livelihoods depend on the coal sector – how can these livelihoods be protected? And how can an inclusive green economy be built? What roles can the private sector play – in particular to fund this? 

These questions are investigated in the second of three reports ‘Funding social justice in the energy transition’ released by the Africa Climate Foundation (ACF) this week and produced by Intellidex. The series looks at achieving the scale in our Transition that is required, particularly through a financing lens. The first report looked at reforms needed to achieve scale for a broad range of funding needs including mitigation. 

This second report finds that very large amounts of funding will be required to promote positive social outcomes and to prevent deterioration in poverty and unemployment that a completely unmanaged transition would bring about. The scale of financing required necessitates the greater involvement of private capital to complement the efforts of the state – often with the two structured in innovative ways side by side. At present seeing these volumes of funding mobilised is challenging if nothing changes, against the backdrop of a constrained fiscus. 

The report recommends the following areas of action therefore to mobilise more financing: 

But the authors emphasise that much of this is very new, not only in South Africa, and this complicates greater private sector participation in the just energy transition.  

Executive Director of the ACF Saliem Fakhir says “Many stakeholders and funders of South Africa’s transition at home and abroad are keenly focused on ensuring this is a Just Transition but the nuts and bolts of actually achieving these outcomes, particularly over the time periods involved, is still in the process of being uncovered. The release of this report today goes into detail on the changes and reforms required to get private sector capital – structured in some cases in innovate ways – to start to flow.”  

Project principal and Managing Director at Intellidex Peter Attard Montalto says, “we should not underestimate the hard work and innovation required to achieve funding of JET at scale – without which we will be left only with some interesting small funding pilots and small innovative case studies rather than a broader, dynamic funding ecosystem”. Building this ecosystem through an iterative process of trial and error and continuous learning is a critical precondition for the large-scale flow of funds that will be required.  

The report Funding social justice in the energy transition can be accessed here. 

ACF and Intellidex will be hosting a webinar to discuss their first two reports on scaling financing for JET next Wednesday, 29 March at 13:30 SAST – a link to register can be found here 


Leading research and consulting firm Intellidex has appointed Dr Roy Havemann as CEO of its South African business. He will work with Intellidex’s client base of institutional investors, banks, corporates and market infrastructure providers, as well as domestic and international bodies on policy development.

“We are very excited to have Roy joining us as a senior member of the team,” says Intellidex chairman Dr Stuart Theobald. “Roy is well known in South Africa’s financial industry as an outstanding strategy and policy thinker. He has led the most critical banking and financial system reforms in the country of the past decade, from Twin Peaks to the resolution of African Bank. He shares Intellidex’s ambition to support the development of the financial sector to achieve positive social outcomes.”

Roy has over twenty years of experience in the public and private sectors, and a strong academic background. He joins from the Western Cape Government where he was head of fiscal and economic services. He worked for the province after a 15 year career with National Treasury, latterly as chief director of financial markets and stability. Prior to that he was at Deloitte Consulting with clients including Eskom, Sanral and Sasol.

“It is a very exciting time to be joining Intellidex,” says Roy. “The company is building an international platform to support financial system development across the emerging markets. Its competencies range from advising global investors on strategies for investment through to advising philanthropies on improving impact. I am looking forward to supporting its growth ambitions.”

Roy will be the senior leader of the business in South Africa where Intellidex was founded 15 years ago. It is rapidly expanding as it works on pressing issues like the just energy transition and impact investing. He will also work alongside executive directors based in London and Boston to develop the global business.

“Intellidex has a unique proposition in bringing together strong technical competence in capital markets and financial systems, with social development,” says Stuart. “Our services are in demand as the world continues to grapple with how finance can better support positive social outcomes, especially in emerging markets. Roy brings great experience that will improve our ability to deliver for clients.”

For media enquiries, please contact Jennifer Kann (

About Intellidex

Intellidex is a research-led consulting firm that specialises in capital markets and financial services in emerging markets. We cover the full spectrum of capital from global institutional investment to philanthropy and have an expanding impact investment and just energy transition practice. Our analysis is used by investors, banks, stockbrokers, regulators, multilateral corporations, lawyers, governments and companies around the world looking to invest in and develop emerging markets. Our market and strategy research is used by banks, fund managers, stock brokers, wealth managers and other financial service providers to better understand their market places. We also publish highly influential reports based on our research. We have offices in London, Boston, Sandton and Cape Town.

See for more information.

There is a global banking crisis under way the likes of which we have not seen since the global financial crisis. Could it affect SA’s banks? In a word, “no”.

The issues plaguing US banks and Credit Suisse in Europe are unique. The US mid-tier banking system crisis is reminiscent of the small banks crisis in SA that raged in the early 2000s. There are two principle causes of the US crisis: an outdated accounting treatment for those banks’ portfolios of government bonds, and an astoundingly light-touch regulatory approach that exempted banks with less than $250bn in assets from the stress tests that would have revealed the problems. In SA this would never happen — banks’ portfolios of financial instruments are marked-to-market so pain is visible right away, a requirement of the accounting standard IFRS 13. And the Reserve Bank’s stress testing of interest rate risk is stringent and universal.

The collapse of Silicon Valley Bank (SVB) reflected one of the oldest risks in banking: it raised money from short-term deposits and invested it in long-term assets. This “maturity transformation” is an important economic function of banks. But when banks don’t manage the interest rate risk that arises, it can fell them. This was precisely the problem in SA’s small banks crisis when several banks used short-term deposits from fickle corporate customers to fund long-term loan books. When confidence began to fray following the bust and the legacy of the 1998 emerging markets crisis, the run on the banks could not be met with easy-to-access liquid assets. SVB has had the same problem.

A large part — 43% — of SVB’s assets were US government bonds. The bank had grown fast since the pandemic, nearly doubling deposits between 2021 and 2022. Banks can’t originate “normal” loans as quickly, so the easy option is to park this cash in government bonds. Because those were yielding nearly nothing at the shorter end, SVB put them into long-term government bonds. Such bonds are fixed-rate instruments, meaning the interest earned doesn’t change, even though bonds have 30 years or more until maturity. So when rates started rising in the US, deposits must be paid more interest, but the bank wasn’t earning any more on its portfolio of bonds.

Normally that would have been obvious to the market and the bank would have had to actively trade out of the exposure. But under US banking rules, a bank can park government bonds in a portfolio that is held to maturity, and value them at the face value of the bonds rather than current prices. This meant the bank didn’t have to register losses, and therefore didn’t have to do anything about them. It is clear on SVB’s statutory accounts that the gap between fair value and par value for its bond portfolio was widening and was at $15bn in its accounts for the year to end-2022, according to financial statements published on February 24, while total equity was just $16bn. The share price started to tank only two weeks after those numbers were released.

Interestingly, some of this resonates in SA. The banking system here has also seen a big spike in deposits since the Covid crisis, rising from R4.6-trillion to R5.4-trillion, or from 67% to 74% of assets. Similar to banks elsewhere, it has parked this extra cash in government bonds, which have risen from 7% to 11% of assets, a record. Longer-term bonds in SA have not seen the same level of pricing shift as in the US, so that portfolio has not registered anything like the losses. Also, banks are far more active in managing duration risk by ensuring the liability side of the balance sheet has longer term rates too, and by using derivatives like swaps. Banks must ensure they stick within liquidity and interest rate risk ratios, which they report on every month to the Reserve Bank. Risk is just much better managed here than the US.

The US mid-tier banking sector has seen share prices crash by a quarter. European banks are down about 16%, primarily due to Credit Suisse’s woes, though those are caused by a bad business model more than crazy interest rate risk management. Emerging markets banks are down only about 4% on the back of the chaos. SA banks are down about 8%, despite having just come out of a results season with record earnings.

In SA, the Reserve Bank has been actively concerned about the “bank-sovereign nexus” that arises when the sector is too exposed to government’s finances. Concern spiked early in the Covid period when the government’s debt trajectory was alarming. Since then, the government’s debt ratios have improved, so there is less concern. Banks, however, need a decent market recovery to start rebuilding their loan portfolios and diversifying their assets away from the sovereign. The SVB experience provides another reason to do so.

• Theobald is chair of research-led consultancy Intellidex. This article first appeared in Business Day.

Does our new electricity minister believe in fact- and reality-based policymaking?

An odd question perhaps, but it seems a pertinent one given the levels of contestation and vested interests floating around the energy crisis (and therefore solving load-shedding).

For whatever criticisms one can throw at the new minister — in his previous job as infrastructure panjandrum there are certainly a few — being divorced from reality was not really one of them. His recent LinkedIn missive is testament to this.

Why is this important? Because for all the ill-necessity of having an electricity minister or a state of disaster, actually the role of being top cheese of the president’s national energy crisis committee (Necom) is to deal with reality-based policymaking — and doing battle with the countervailing forces in the political sphere. This has of course been the success of Operation Vulindlela in recent years, slowly chipping away at the shibboleth of ideology-driven fake news that have surrounded so many reform issues.

We got a keen reminder of this only last week when the hoary old chestnut of how much renewables actually cost was again raised by our mining and energy minister and the same fake news was forthcoming — implying that the costs of early REIPPP rounds priced electricity provision at the same level now. This even after his own department’s emergency request had seen (overwrought) tenders for baseload renewables (renewables plus batteries) at prices much lower than those of earlier REIPPP rounds.

All this is very dull and repeats itself periodically, which is why the new electricity minister is going to have to take on such (political) battles and win them to drive the Necom plan.

But the landscape and these battles are not constant. We have seen a meaningful step up since December in contestation over the just energy transition broadly, over SOE reform (with conflicting messaging from the government and the president), and over the broader reform agenda, including ports.

The problem here — after the state of the nation address and all the usual start-year pageantry — is that investors (domestic and foreign) are feeling incredibly jaded. Sentiment is now lower than it was last year or any time since 2017 — perhaps lower than during the state capture years when there was a sense of a turning point within reach.

There has been a broad abandoning by investors of a view that a political alternative is available next year — either from the DA or other opposition parties or from any of the new proto-parties. Some of this is unfair but not irrational in its view given the drama in Gauteng metros where no-one has come out smelling of roses. The ANC of course will be hoping that the election ends up being a “better the devil you know” vote than a risk-loving, protest-vote-driven outcome.

Investor scepticism

Investor scepticism here is dangerous. Normally in an emerging market there is tension between those who think a turning point will occur and those who think it will be missed. But there is a consensus that the turning point is there, a possibility, a path that can have a probability assigned to it. This was very much the discussion at the time of Ramaphoria — it is what has driven large asset flows in recent years in places like Brazil. Now, however, there is just a consistent gloom around SA.

The unfortunate fact is that nothing much can be said at the forthcoming investment conference to shift this. If anything, the endless parade of “deals” (often opex dressed up as capex or mysterious and lacking detail like the African Development Bank commitments last year) can actually make sentiment worse because investors know it’s a ruse.

This sentiment problem isn’t new, yet arguably there are signs of a turning point. Why are people not picking this up?

Eskom has 14GW of projects with or about to get grid access. Nersa registered more than 1GW of new projects — with larger ones coming through — since the start of the year. Rooftop solar installation is gaining momentum and now, with added tax incentives, may well reach several GW this year.

Yet the problem remains the lack of a politically decisive path forward.

It’s always been widely recognised in commentariat circles that there is a lack of political basis for change as a society at present. But this has now (yes perhaps rather late) dawned on investors as well with an election staring us in the face.

The political climate can certainly drive investors, with elections often seen as major turning points for sentiment and capital flows. Yet just as SA misses out on commodity cycles, so it may well miss out on this electoral investment flow cycle that might have otherwise happened.

This is all sounding bleak given that I am rather more positive than consensus on the ability to substantively solve load-shedding by the end of 2025 based on the momentum currently seen, even with all the known constraints. Yet the logistics, the labour market, the productivity, the education, the industrial policy crises are all brewing. These are all too big to just make promises in a speech without the underlying political change required.

There is no credible sense that a DA/ANC coalition would offer this kind of change and therefore would be wholly destructive to both parties (for different reasons). Both parties would have to excise their demons in too dramatic a way for such a coalition to be successful, which is just not possible — those demons being fundamental to their respective natures.

An EFF/ANC coalition by contrast can be more simply analysed and dismissed as the font of positive change. No-one has yet shown the political maturity that political change can be trusted through an opposition coalition — especially with the larger powers of national level.

We are therefore left with a rather unsatisfactory hope that the reality-based policymaking we are looking for in the new minister can win through. Wins can ratchet up slowly, case by case, supported by capacity from wherever it is available — like business — but the capital flows more broadly will be limited and benefit of the doubt won’t, and is not, being given by investors.

I’ve said before that I don’t think SA takes it seriously enough that it isn’t a real commodity country if it sits out commodity cycles. The same is true of a lack of cycle around elections and reform. This is not how things are meant to be as an emerging market!

• Attard Montalto leads on political economy, markets and the just energy transition at Intellidex, an SA research-led consulting company. This article first appeared in Business Day.

With the economy blighted by load-shedding, some may be surprised to see banks reporting record profits for 2022. How are they doing it? In short: higher interest rates and lower bad debts. But there are clear reasons why shareholders will be cautious about popping champagne.

FirstRand was the first to report last week, in its case for the second half of last year, showing profits of R18bn, 15% more than 2021’s matching period and much higher than before Covid-19. We will see even bigger records from the other major banks when they report over the next two weeks (Standard Bank has guided the market to expect growth of 30%-35%, Nedbank 24%-29%, Absa 10%-15%).

This growth is not thanks to the general economy; that has been dismal. While Covid-19 disruptions make it difficult to analyse GDP trends, the first three quarters of 2022 showed nominal GDP 18% higher than in 2019. Once inflation is factored in, the economy is barely bigger than three years ago. However, FirstRand’s nominal profits were 29% higher in the second half of 2022 compared with 2019. Nominal GDP growth in the first three quarters of 2022 averaged 7.1% (and we’ll get the full picture for the year on Tuesday when Stats SA announces the fourth quarter). Employment is similarly leaning against the banks, with the numbers employed in the formal sector still lower than in 2019 (10-million vs 10.2-million in 2019).

The banks have been able to overcome these headwinds thanks to a few factors. They benefit from rising rates because they have two sources of interest-free funding: shareholder’s capital, and “lazy deposits” on which they pay no interest. In FirstRand’s case, however, margins were only marginally higher, and that thanks entirely to its UK business. Margins in SA were negatively affected by a shift in its portfolio to more corporate lending, which earns less interest. I expect the other banks will see much higher margin growth thanks to a better balance of retail lending. Corporate and Investment Bank (CIB) lending was helped by one area of strong volumes for all the banks: helping companies finance off-grid electricity and funding new electricity projects.

Bad debts

Geographic diversity also helps — the big four banks have exposure to the rest of Africa to varying degrees and FirstRand owns a UK bank. These can be volatile sources of earnings, for example Ghana’s sovereign debt default has hurt most banks’ numbers for 2022, but overall African exposures helped earnings last year.

The other major source of profits has been a fall in bad debts. Banks have been cautious post the Covid-19 crisis. When the crisis first struck, all the banks rapidly set aside money to pay for a sharp increase in customer defaults. But one of the surprises of the Covid-19 period was how well customers were able to continue paying for their debts. This has allowed the banks to release provisions, which is treated as a source of income on the income statements.

This was not particularly helpful in FirstRand’s case, as it released provisions in the comparable period, creating a base effect that held back earnings growth this period, but underlying customer performance is continuing to improve. This was clear in the drop in non-performing loans, with FirstRand’s defaulting loans falling from 3.9% to 3.6% of its loan book. Credit performance is improving as clients that struggled during lockdowns are now largely worked out of the books. What’s left, particularly in FirstRand’s case, is a more creditworthy book.

The problem is how to sustain this growth. Earnings this period are being delivered by cyclical factors: an improving credit performance and the higher interest rate cycle. We are not seeing growth in top line — the kind of growth driven by real improvements in economic activity. FirstRand’s overall book grew 11%, a lot of this due to corporate credit demand to finance electricity generation.

Colossal effort

What banks want to see is businesses investing to expand output, not to merely protect existing output, which is what much of the electricity investment is doing. We have not seen a sustained increase in investment levels in SA since 2008 and it is difficult to see any trigger for improvements on the horizon, given load-shedding is at least a few years away from being resolved.

FirstRand declared that a “colossal effort” will be required to rebuild economic capacity, calling for increased private sector involvement in structural reform of the economy to shift potential growth upwards.

There are obvious opportunities: the mining industry could be exporting much more if we could just get the rail and port capacity right. There is more that could be done to enable the expansion of private electricity generation. Somehow, we need to trigger confidence in the future, the kind that will get shareholders to put their capital at risk to invest for payoffs that are years down the line. That remains the missing ingredient that fundamentally constrains the banks’ performance.

• Theobald is chair of research-led consulting firm Intellidex. This article first appeared in Business Day.

Intellidex chairman Dr Stuart Theobald joined Newzroom Afrika to weigh in on South Africa’s greylist status.

“FATF points out that South Africa is way below than it should be in terms of requests for foreign agencies. So, it suggests that at the investigation level as well as the prosecution level we aren’t doing enough to engage with the rest of the world to deal with international crime. These are quite technical deficiencies where we really need to improve institutional capacity. The numbers of people, investigators, working in these departments that supervise the processes that apply to everybody from second-hand car dealers through to attorney firms in ensuring their compliance with reportable transactions and supervision and so on.

Watch the full discussion below.