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SA banks at risk of deepest profit slump in 50 years

As lockdown measures lead to a surge in bad debts.
Image: Supplied

South African banks face the steepest earnings slump in half a century — with some posting losses — as measures to curb the coronavirus drag the economy deeper into recession and lead to a surge in bad debts.

“I have looked at each and every crisis in the last fifty-odd years and there is nothing this severe,” said Corné Conradie, an actuary and partner at auditing and consultancy firm PwC in Johannesburg. “The potential drop in gross domestic product is bigger than any of the previous stresses.”

Only one of the big four banks has reported an adjusted net-income loss since 1992, when Bloomberg began compiling data. That was in 2003, when Nedbank Group set aside more money for taxes, wrote down technology investments and changed accounting policies. Standard Bank Group reported its sole annual-profit decline in 2010 in the wake of the global financial crisis, while FirstRand’s earnings shrank in 2008 and 2009.

Fast forward to this year and South Africa’s GDP could contract 7%, according to the country’s central bank, as government restrictions keep businesses closed and consumers at home to slow the spread of Covid-19. The outlook is so uncertain that the best estimate banks, including Absa Group, can give is that profit will be down at least 20%.

“The earnings for the banks to June will be substantially down,” said Jan Meintjes, a portfolio manager at Cape Town-based Denker Capital. “Is it going to be closer to 30%, 40% or 70%? No one knows.”

The banking regulator — while lauding the industry’s high capital and liquidity buffers — is also bearish. On a call with investors last week, Prudential Authority chief executive officer Kuben Naidoo said banks could make losses as an increase in expected loan defaults result in higher provisions.

Read: Absa says coronavirus crisis had substantial impact in April

Virus wipes 20% off FNB customers’ income

Banks are making less revenue from interest charges following a drop in benchmark rates to a record low, transactions have slowed down due to the lockdowns and a surge in job losses will make it harder for customers to repay debt.

‘Bad debt experience’

While losses may not come in the first-half cycle, they’re not completely out of the question for the second, said Meintjes. “That will be because of the reality of the actual bad-debt experience, emerging to the latter part of the year being substantially worse than what the models indicated mid-year.”

Most major shocks to South Africa’s finance system have been isolated.

The 2014 collapse of African Bank Investments was caused when bad debts spiralled and debtholders stopped funding the unsecured lender. Saambou Holdings folded in 2002 after customers lost confidence and withdrew their savings. In March 2018, VBS Mutual Bank was taken over by administrators amid allegations of fraud.

The banking industry should remain profitable if credit-loss ratios are in line with the global financial crisis, when earnings fell by around 30%, and banks continued to pay dividends, said Renier de Bruyn, an analyst at Sanlam Private Wealth.

Standard Bank and Absa said they expect impairments to soar to levels above what was seen when the subprime crisis in the U.S. sent shock waves throughout the world. All the banks barring FirstRand, the only one to report earnings in the 12 months through June, have scrapped interim dividends.

‘Wipe out’

With fairly diversified portfolios, banks could be impacted differently, De Bruyn said. “We may see the residential mortgage books perform better in the current crisis,” he said. “But commercial and consumer loans could perform worse than in the global financial crisis.”

In research spanning South Africa’s five largest full-service banks, which together own 94% of the industry’s loans, stress testing by PwC, even under the worst scenarios, found the industry will remain resilient through the Covid-19 crisis. The companies make at least R80 billion in profit on a credit book of just over R4 trillion, Conradie said.

“You don’t need a big percentage of those loans to go bad to wipe out that number,” he said.

© 2020 Bloomberg


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“We may see the residential mortgage books perform better in the current crisis,”

Why would you think that?

Wonder how one pays a home loan when you’ve lost your job!
This is usually where the banks, like wolves in sheep’s clothes, trick the pressured client with so-called options to “help “

Stricter underwriting criteria, lower loan-to-values than in the past. More mortgages originated by banks themselves rather than mortgage originators. House prices did not grow at the 10% plus rate that they did before the 2008 downturn.

Please note I am not saying that it will not be bad and that lots of people will not default, just that certain fundamentals are better than in the past.

SME/Corporate Loans different story

I know I am going to be absolutely lambasted for this but it is interesting to see a bit of a socialist tinge to comments on MW nowadays. Banks should support the needy, unethical to make a profit in this environment, firms should not retrench etc etc.

Yet I seem to recall quite different comments in the past when it was mostly lower skilled/unskilled labour nthat was under pressure. The sentiment then was very much one of “that is the nature of capitalism”, “structurual changes”, “should pull themselves up by the bootstraps”, “build something for themselves” etc etc

If this comes across as scahdenfreude from a socialst thinking that he has been proven right, I apologise it is not meant to be that. I just want to say that we sometimes think differently about the impact that tghe economy and its cycles have on people lifes depending how far removed it is from us – inevitably the closer to home it is we become more “socialist” in our thinking.

Maybe something to beasr in mind next time we complain about R1000 pm government grants…

Cry me a river. For 50 years the banks were ahead. They misused their power. Nailed the little guy. Now they can join the crowd with those that suffered because of Covid19 and the ANC bad judgement.

They’re not suffering – their profits are merely down…

Agree. They will also be bailed out by the SARB if the crap hits the fan.

However, new entrants (Capitec, Tyme) are giving the old Donkies (FNB, Standard bank, ABSA) a run for their money.
ABSA is bleeding customers… So is STD Bank… and FNB (most expensive bank)

So this is after their “downsizings?” This is after all the retrenchments? This is after they have migrated seriously to digital? This is after closing many banking facilities? I have never been a fan of banks and it sounds like theirs something wrong?

Normally R80bn profit – quite a wack!
But no sympathy for them; if they need money badly suggest they get it from SAA and the government guarantees they hold. If these banks – with Nedbank in front – didn’t suck up to government’s SOE fantasies and contained their greed, they AND the entire economy – not to mention tax payers – wouldn’t be in the current financial mess. Let the banks suffer!

On the button Louise- greedy cowards fleecing their customers to appease the ANC.

A drop in PROFIT…what the hell, most firms are busy just trying to pay their workers and they are stressing about a 30-40% drop in PROFIT. The banks are all already squeezing their smaller suppliers with demands for 20-30% reductions….at that rate most of the suppliers will end up paying THEM money. I’m a capitalist but right now I am happy just to maintain my capital, I have limited expectation for a return…the banks should be the same.

Don’t get it. Our first worldwide pandemic and in over a hundred years and everyone is comparing corporate performance to “peacetime” indicators?

In a crisis like this all journalists and institutional shareholders should be measuring things in net balance sheet loss to epidemic. The only way you help the population to get through this financially is give up balance sheet in support. The fact that profit is being reported on is crazy. Anyone still in profit points to not supporting their client base enough in a majorly tough time. This has also highlighted the pressure on companies to get any spare cash and assets out to customers in dividends. There is massive wealth in this world in wealth management companies and investment houses. The world’s wealthy can afford to have 1 years where they take a hit on their balance sheet to help those really battling financially in this crisis.

I don’t subscribe to “rich give to poor because its fair” mentality. I do subscribe to human empathy in action in that more fortunate will give to those less fortunate when you have a financial disaster of this scale and that means companies as well.

Ryan, I agree and the worst thing here is that those who are not fortunate enough to get through this will literally lose everything they have in the process and the “more fortunate” will snap that up at a song and be even more wealthy when this over. Not only that years from now we will be recognizing the “more fortunate” for the levels of business skills and astuteness. And nobody will look back at or give a flying S@#t about everybody who lost everything and will most probably never recover from this. But hey let’s wait around for a bit before some reader in this article comments about how people overspend and live on credit and deserve what comes oh, I am a socialist in my thinking.
Thank you Ryan for having the balls to call it what it is, pity the banks will never get it.

One realises that, in the media, negative sections of a written article to be be overstated and positive news subdued (to lure higher reader numbers / advertising revenue)

My assurance of the resilience of local banks lies in the past bottom paragraph, quote “…even under the worst scenarios, found the industry will remain resilient through the Covid-19 crisis.”

But the the fact that this assurance comes from the auditing/accounting industry (nothing against PwC in particular) stating that “stress testing” has been done.

How sure are auditors their “stress tests” on banks work reliably? I mean, this is the same industry that did not see Steinhoff / Tongaat, VBS Bank coming like an asteroid!

Yet another reason to use independent quality offshore asset managers for offshore wealth diversification purposes, and not a SA domestic banking group – or a asset manager by a different name but still wholly owned by the bank! How is placing offshore savings from a SA resident with a South African owned provider providing full independence of thought and true diversification? Speak to an independent advisor and not a “tied agent” or “Private Banker”… Such job titles tend to be Group product salespeople, hence conflicted.. and how do they then provide best advice, if selecting in-house services?

The fact that the Reserve Bank has been buying bonds at unprecedented levels “in the secondary market” – from banks that is – implies that there is a run on the banks. There has been run on the banks on an international scale since lockdown began. The situation is much worse than any of us may realise. The banking system would have imploded by now if Reserve Banks did not create liquidity at a rate that has never been seen before. Lockdown is the most destructive debt-deflation event in history. The fact that our cards still work, and that we still have access to our banking services, attest to the efficiency of Reserve Banks.

Reserve Banks are currently being tested like never before in history because the overhang of imploding debt has never been larger.

Ah a sensible voice amongst a cackle. If banks fail then those who support such a travesty better get their barter coins out to conduct financial transactions

Small banks like Investec (not even mentioned in this article) – are carrying the most risk. Boutique Banks is the ”in-thing” for the rich and famous, in good times – one only has to see what is happening to the sales at places like Richmont to realize – everybody is at risk.

My guess is that small banks like Investec have to guard at controversial shenanigans that can cause their share price to drop like in 2009 – big banks like Standard Bank will ”gobble” them up very fast!

End of comments.





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