When the major South African banks announced their results over the last two weeks, the management teams of each noted the exceptional challenges of an unprecedented economic environment during 2020.
According to an overview of banks’ results by PwC, aggregate headline earnings for all of the banks declined by more than 48% in 2020 compared to the previous financial year, return on equity more than halved from 17.8% to 8.3%, and provisions for bad debt increased by 2.5 times.
Looking at the actual figures, the headline earnings of the large retail banks that published their results recently declined by more than R50 billion from nearly R85 billion in 2019 to R43.6 billion last year, with PwC noting that the combined profit of the banks is now lower than in 2013.
The results showed that the major reason for the decline was the increase in provisions for bad debt. In reality, policies and accounting rules pertaining to the provision for bad debt means these provisions are likely to turn out to be real losses, rather than just book entries.
The figures indicate that thousands of households are facing severe financial difficulties.
The PwC analysis included the annual results of FNB, Nedbank and Standard Bank for the year to end December, while Absa’s interim results for the six month to December were combined with that of the second half of the previous financial year to be able to compare the annual figures. Investec and Capitec were excluded due to a different product mix and different reporting periods.
Costa Natsas, financial services leader of PwC Africa, noted during a presentation of the PwC analysis that the SA economy started 2020 with the lowest economic growth since the 2009 financial crisis, and then it became worse.
“Because financial services, and banking in particular, function at the epicentre of the broader economic context, banks’ financial performance is closely tied to the economies in which they operate,” says Natsas.
“The severe disruptions and risks brought about by the Covid-19 pandemic are clearly evident in the major banks’ results for the year ended 31 December 2020.
“The tragedy of numbers is that they cannot fully capture the dire human, social and economic costs caused by the pandemic.
“When the history books complete the accounting for 2020, [they] will recount a profound period – one that altered the trajectory of lives and livelihoods, societies and economies, businesses and households – on a global scale,” says Natsas.
PwC mentions a few stark truths about the SA economy: “The economy has laboured under structural constraints, deteriorating growth trends, worrying unemployment levels and limited fiscal space that [had] been well documented long before Covid-19.
“Quantifying the domestic economic performance of 2020, as Statistics SA notes, makes for sobering reading. While the 7% contraction in the South African economy in 2020 represents a cardiac arrest driven by crisis conditions, it does not diminish the declining domestic economic trends that have prevailed for more than a decade,” according to the analysis.
The analysts note that inflation-adjusted GDP per capita peaked in 2014 and has been declining since then, which highlights the extent to which struggling economic growth has battled to keep pace with population growth.
They says SA was in some form of lockdown for 279 days during in 2020, with the consequence that GDP per capita decreased to 2005 levels.
Personal finances, as evidenced by the banks’ financial results, took a beating.
PwC identified several common trends in its analysis of the banking sector’s results:
- Driven by a steep increase in credit impairment charges of 2.5 times against FY19, the major banks’ combined headline earnings and return on equity fell to 2012 levels.
- The second half of 2020 saw credit performance and business volumes faring relatively better than expected compared to the first half-year as lockdown restrictions eased, but were still far worse than pre-pandemic levels.
- None of the banks declared interim dividends and some passed on final dividends as well, citing capital preservation and the uncertain earnings outlook as reasons for these decisions.
- While the extent of credit impairments played out differently across loan portfolios, geographies and industries, the steep increase is both undeniable and unsurprising.
- On the back of increased impairments, the combined credit loss ratio (credit impairment charge for the reporting period as a percentage of average advances) deteriorated. Non-performing loans increased sharply during 2020, amounting to 5.6% of total loans (4.9% at the end of 2019).
- However, deposit growth benefitted from cautious household and consumer behaviour, as savings increased amid the uncertain environment and prudent cash management strategies were employed by corporate account holders.
Francois Prinsloo, banking and capital markets leader for PwC Africa, says that while the major banks’ results are reflective of an intensely challenging operating environment, they also reveal SA bank’s resilience.
His take on the analysis brings two aspects to the fore, namely that banks’ technology-enabled and customer-centric strategies will feature prominently going forward, and that SA banks are financially strong.
There is an undeniable flight to digital and mobile banking platforms – a trend that pre-dates the pandemic – and 2020 saw record volumes of banking transactions conducted through lower-cost digital channels across all customer segments, says Prinsloo.
However, he adds that branches are not “dead” and that the major banks recognise that their branch networks will continue to play a central role in their overall distribution strategies in the future, but that the size, scope and configuration of the physical branch network will most likely be different.
When the pandemic started, banks shifted their strategic focus from managing profitability and delivering stakeholder returns to managing operational stability and ensuring balance sheet resilience, says Prinsloo. He says this resulted in both technology infrastructure and customer service levels holding up without major incident despite the sudden increase in digital transaction volumes.
If one looks at the banks individually, the results all show continued increases in the cost of networks and technology while staff costs increased very little.
Prinsloo mentions that all the major banks maintained their capital levels comfortably above regulatory requirements and none needed to make use of any of the relaxations announced by authorities.
Banks did not use relief measures offered by authorities
Rivaan Roopnarain, PwC Africa banking partner says a key take-away is that SA banks are well managed. “Banks have shown their ability to respond purposefully to crisis conditions.
“For the majority of the major banks’ management teams and their people, 2020 will have been the most difficult and complex year on record,” says Roopnarain.
He took a good look at what the management teams predicted for the future, saying that uncertainty will continue from a public health and from an economic standpoint. “The common consensus is that of more uncertainty ahead.
“Some of the major banks have cautiously indicated in their results announcements that they are hopeful to have seen the bottom from an earnings perspective. Early indicators emanating in the first quarter of 2021 show a sliver of positivity – with increased client activity, retail credit collections and early-stage debt relief showing a few promising trends,” he says.
“The major banks hope that earnings trends return to more business-as-usual levels as impairments stabilise. Consequently, a strong focus on credit collections is likely to be a key theme of activity in 2021.
“Positive indicators come with heavy caution – as some commentators note that there is little to no pent-up demand seen on the immediate horizon: in their view, the economy is simply too weak and unemployment too high to contemplate what a meaningful recovery might look like,” says Roopnarain.
PwC concluded that its analysts expect that it will take a few years for GDP to return to pre-pandemic levels. “Through this crisis, however, the major banks have demonstrated their intent to be part of the solution,” notes the report.
The analysis actually delivers good news in the sense that SA banks survived the battle last year, despite some serious damage – and although we like to criticise banks and bankers, healthy banks are essential.