Factors influencing our performance

Disappointing macro backdrop

South Africa’s economic growth disappointed for the fourth consecutive year, with real GDP growing 0.3%, well below the 1.8% we had forecast. A weak job market, low consumer confidence, rising interest rates and higher inflation placed strain on households, impacting credit quality and retail loan growth. Businesses responded to the volatile environment and weak demand by curtailing investment spending, and a severe drought impacted the agriculture and related sectors.

The commodity cycle downturn, drought, electricity shortages, an adverse external environment and weaker fiscal balances in several countries also reduced economic growth in the Rest of Africa. Consequently, real GDP growth moderated to 3.7% on average across our presence countries, the lowest level since 2002. We have limited exposure to oil-exporting countries and growth across our portfolio remained well above that of South Africa.

Currency fluctuations

With Rest of Africa’s increasing contribution to the Group, currency translations again impacted our results, particularly after the rand weakness in December 2015. This was noticeable in the first half of 2016, when rand weakness added 15% to Rest of Africa’s revenue and 26% to its headline earnings. However, with the rand strength in the second half, the spot rate reduced our Rest of Africa loans and deposits by 13% year-on-year, while the weaker average rate for the year added 5% to our Rest of Africa revenue, and 3% to its costs and headline earnings. The impact of currency fluctuation was less at a Group level, as the average exchange rate added 1% to our earnings, a revenue and costs. It is worth noting that the current rand strength would be a drag on Rest of Africa’s contribution in 2017, particularly in the first half.

Regulatory changes

Regulatory changes continue to impact our operations, earnings and balance sheet. Changes to interchange fees reduced our debit and credit card income in South Africa by R300m in 2015 and a further small amount in 2016. The National Credit Regulator introduced lower retail lending interest rate caps in South Africa effective from May 2016, which reduced our margins in personal loans and credit cards. The net impact was over R300m after mitigation, largely in the second half and will remain a drag in the first half of 2017. Introducing the National Credit Act income verification requirements reduced our credit card asset growth. Regulatory changes have impacted our balance sheet. These included new liquidity requirements, which we estimate cost an additional R150m in 2016 to improve our already strong liquidity levels.

We continue to see regulatory changes across the Rest of Africa, most notably, the Central Bank of Kenya introduced a retrospective interest rate cap on lending, and floor on deposits in September. These will reduce our Kenyan revenue in 2017, prior to any mitigation actions.

A diverse franchise

Our resilient 2016 performance demonstrates the benefits we enjoy from having a diverse portfolio of businesses, both by activity and geography. Within WIMI, solid South African growth largely absorbed losses in the Rest of Africa. At a divisional level, CIB’s strong earnings growth offset lower earnings from WIMI and our largest franchise, RBB. It was also further evident within operating divisions, including RBB South Africa’s well-balanced mix where, despite regulatory pressures, solid growth in Personal Loans and growth in Transactional and Deposits, Card and Business Banking partly offset reduced earnings in Home Loans and Vehicle and Asset Finance.

Rest of Africa strategy continues to deliver

Despite the tough macro environment in the Rest of Africa, our operations continued to enhance Group growth. Revenue grew 16%, or 11% in constant currency, well above South Africa’s 5% increase. Its 17% headline earnings growth also exceeded South Africa’s 2%. In fact, our Rest of Africa earnings have grown at more than double our South African rate since 2013, to now account for 19% of Group earnings from 15%. The acquisition of Barclays’ Rest of Africa franchise remains earnings-enhancing. Importantly, these operations remain well-diversified, given our portfolio of countries, which protected us from difficult operating conditions in certain markets last year. It also has a good mix between CIB, where earnings grew 43%, and RBB, where earnings declined 3%. Hence, our Rest of Africa banking earnings grew 25%, to R2.8bn.

We continue to see attractive growth prospects in the Rest of Africa. Within RBB, retail credit penetration and access to banking are relatively low and offer a structural growth story in the longer term. We are also underweight in Business Banking, particularly SMEs, agriculture and the public sector. We expect to reduce RBB Rest of Africa’s high 67.9% cost-to-income ratio through rolling out new products, improving its efficiency and growing its top line. There is scope to grow CIB further, initially in Markets and through targeted lending, and then by increasing our corporate transactional component. Hence, we aim to improve Rest of Africa’s 15.8% banking return on equity medium term. Although WIMI posted a loss outside South Africa, barring any other unforeseen external influence, we are confident of a better performance from these operations.