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South African Peer Bank Analysis - H1:21 an EY Banking & Capital Markets Benchmark Report (Summarised) August 2021 Executive Summary Banks Benchmark Report 2021

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South African Peer Bank Analysis - H1:21 an EY Banking & Capital Markets Benchmark Report (Summarised) August 2021 Executive Summary Banks Benchmark Report 2021 South African Peer Bank Analysis - H1:21 An EY Banking & Capital Markets Benchmark Report (summarised) August 2021 Executive summary Banks benchmark report 2021 While we have learned much about COVID-19 and its according to the SA Property Owners Association and has implications, the situation continues to evolve, and led to downward revisions to the economic outlook for the heightened uncertainty remains. Countries that were year. Over and above this, trade has been affected by the thought to be over the worst are seeing rising COVID-19 recent cyber-attack at Transnet at the end of July. cases - such as China, Israel and the United States. South Africa, which has been emerging from the worst recession The developing international and local events underline in a century in 2020, continues to battle the third wave with the continued importance of considering economic risk. future waves of the pandemic likely. Although it is difficult to know the future unknowns, or accurately quantify their effects, having considered the In addition, poor economic conditions, worsened by the possible impacts is better than being completely caught pandemic and a delicate political situation, resulted in the unaware. riots in July which caused R50bn in property damages, Strategic themes noted in H1:21 Challenging and volatile macroeconomic environment Weak GDP growth, COVID-19 third wave, low demand, low consumer confidence and electricity supply Key focus disruptions created Recent South on strategy uncertain economy African civil unrest outlook Customer centricity, The unrest and looting migration to platform, that erupted in parts digitalisation, cost of Kwa-Zulu Natal and optimisation and Gauteng from effective capital 9 to 17 July’21 deployment take priority Strategic themes in Digital H1:21 Technology Innovations Investments Developing innovative Implementing digital services technology and enhanced strategy to build a customer platforms modern and modular Favourable operating to increase IT stack environment for engagement customers Increased competition within mortgage markets driving lower rates and benefiting customers 2 South African Banks Analysis Outlook EY Economic outlook GDP growth outlook Following the erratic movements in quarterly output in 2020 the South African economy is expected 8,0 6,8 to grow by 4.3% in 2021 before 6,0 easing to growth rates of 2.5% 6,0 5,3 and 2.4% in 2022 and 2023 4,8 4,7 4,5 4,4 respectively. The evolution of 4,1 ) 4,0 3,9 4,0 4,0 3,7 COVID-19 variants globally and 3,2 2,9 country responses, and the success 2,6 of the vaccine roll-out make these 2,0 projections uncertain. The total level of economic output in South 0,0 Africa is not expected to reach 2019 levels until the first quarter of 2023, according to Oxford - 2,0 GDP, real , annual growth (% -1,6 Economics. However, there has -2,3 been progress on key economic - 4,0 - 3,5 reforms of late, most significantly the release of the regulations to raise the threshold for embedded - 6,0 2019 2020 2021 2022 2023 2024 generation to 100MW which will bolster investor confidence, reduce Africa Emerging Markets World the cost of doing business and support economic growth in the medium term. The extension of the COVID-19 grant of R350 to March 2022 will support individuals affected by joblessness in the short South Africa GDP term and may reduce the likelihood of further unrest. However, there is a concern regarding pressure to South Africa GDP make this grant permanent and 34 00 Forecast 6,0 the effect this would have on the government’s fiscal consolidation 33 00 4,0 path. 32 00 2,0 31 00 0,0 Percent 30 00 -2 ,0 GDP, ZAR billions 29 00 -4 ,0 28 00 -6 ,0 27 00 -8 ,0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 GDP GDP, real annual growth South African Banks Analysis 3 Banks' outlook GDP Growth Repo Rate Absa Nedbank Standard Bank Absa Nedbank Standard Bank 4.0% 4.2% 4.0% 3.5% - 3.5% GDP reduced Previous forecast GDP is expected Repo rate to Repo rate to grow by 7% in FY20, of 5% reduced to to grow 4.0% in FY ’21 grow to 3.9% by to 3.5% by FY21 growth of 4.0% 4.2% due to civil FY21,recent civil FY22 and then and then grow to is forecasted unrest in July 2021 unrest will not Outlook grow to 4.6% by 4.0% by FY22 for FY21. GDP and introduction of impact recovery. FY23 to grow by adjusted lockdown GDP to grow by 2.3% (baseline 4. GDP to grow by 2.10% in scenario) in FY22 2.0% in FY22 H1:22-25 CPI Inflation Prime Interest Rate Absa Nedbank Standard Bank Absa Nedbank Standard Bank 3.7% 4.4% 4.15% no change 7.0% 7.0% Inflation to Inflation to increase Inflation to Policy rates are Prime interest rate Interest rates are increase to 3.7% to 4.5% by FY22 increase to 4.15% FY ’21 unlikely to change to grow to 8% by expected to be 7%, by FY21, 4.0% in and remain stable by FY21, 4.40% in in FY21, expected FY22 and remain unchanged for the FY22 and 4.1% in at 4.4% after FY22 H1:22-25 Outlook to rise by 75 bps constant until FY23 remainder of the FY23 in FY22 then grow to 8.5% years by FY24 KPI outlook NII CLR ROE Expenses NII Around the mid- RoE will improve Low single digit Indicator Mid-single digit point of their materially in 2021 cost growth is growth expected through-the-cycle relative to 2020 will expected, CIR likely Absa range of 75 to 100 be broadly in line to be in line with Comments bps with cost of equity 2020’s 56% NII CLR ROE Expenses Growth to be Expected to be Expected to be Growth to be Indicator between 5% and 7% between 80-110 bps more than 15% between 6% in FY21 and targeted by 2023 and 8% Nedbank 60-100bps in the Comments future NII CLR ROE Expenses Similar to H1:21 In the range of 70 Higher than Sub-inflationary Indicator (361 bps) to 100 bps FY20, below Cost target Standard of equity Bank Comments Source: Absa, Nedbank and Standard Bank Annual & Interim Reports *FirstRand is excluded from the analysis as their 2021Q2 results will only be released in September 2021 4 South African Banks Analysis Financial performance snapshot • Banks reported higher YoY RoE driven by declining provisions, increase of H1:21 deposits growth moderate revenue growth and prudent cost control. Absa posted • Except Absa, non-performing loans deteriorated at other banks the highest gain in its H1:21 RoE • Banks remain well capitalised posting CET1 to grow by an average • Efficiency ratio improved for Absa and Standard Bank driven by of 130bps increase in revenue; lower non-II at Nedbank resulted overall • As lockdown restrictions continue to ease, economic activity started revenue decline to resume. As a result banks posted revenue growth in H1:21 • Absa and Nedbank managed to grow NIM however not at a pre-COVID rate, barring Absa • Loans to deposit ratio declined at all the banks on the back of an Return on Equity (RoE) CIR ratio Net interest margin Improved 15.3% 12.9% 61.8% 4.4% Deteriorated 11.7% 3.7% 3.6% 59.3% 56.4% Absa Nedbank Standard Bank Absa Nedbank Standard Bank Absa Nedbank Standard Bank 1.27pps 690bps 440bps 68bps 260bps 283bps 18bps 35bps 26bps Absolute YoY growth Loan-to-deposit ratio NPL ratio (Stage 3 Loans / Gross Loans) Common Equity Tier 1 (CET1) ratio 83.6% 83.4% 13.5% 6.1% 79.7% 5.6% 5.3% 12.4% 12.2% Absa Nedbank Standard Bank Absa Nedbank Standard Bank Absa Nedbank Standard Bank Absolute 4.2pps 5.4pps 70bps 20bps 30bps 80bps 140bps 160bps 100bps YoY growth Revenues (in ZAR billion) Net interest income (in ZAR billion) Non interest income (in ZAR billion) 65 Improved 30 35 Deteriorated 41 26 28 16 16 12 Absa Nedbank Standard Bank Absa Nedbank Standard Bank Absa Nedbank Standard Bank +2.8% +1.5% +5.4% +6.3% +5.6% -4.0% -2.4% -3.5% +15.0% YoY growth (%) Loans (in ZAR billion) Deposits (in ZAR billion) RWAs (in ZAR billion) 1365 1259 1242 1561 1039 892 936 781 647 Absa Nedbank Standard Bank Absa Nedbank Standard Bank Absa Nedbank Standard Bank +0.8% -6.9% -1.8% +5.8% -0.1% +0.8% -4.7% -4.6% -4.9% YoY growth (%) Source: Absa, Nedbank and Standard Bank Annual & Interim Reports *FirstRand is excluded from the analysis as their 2021Q2 results will only be released in September 2021 South African Banks Analysis 5 A key focus on ECL ECL coverage ratio movements Change in ECL Coverage Ratio – 2019Q2 – 2021Q2* Absa Nedbank Standard Bank 5,0% 4,5% 4,0% 3,8% 3,4% 3,4% 3,0% 3,0% 2,0% 2,2% 1,0% 0,0% 2019 Q2 2019 Q4 2020 Q2 2020 Q4 2021 Q2 Change in ECL Coverage Ratios – Post COVID-19* 2021 Q2 2020 Q2 3,8% Standard + 13.5%Sh Bank 3,3% For further analysis on the 3,4% + 15.6%S Nedbank 3,0% coverage ratios, refer to page 11 4,5% Absa 4,5% + 1.0%Sh Source: Absa, Nedbank and Standard Bank Annual & Interim Reports *FirstRand is excluded from the analysis as their 2021Q2 results will only be released in September 2021.
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