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Covid-19 vs the financial crisis: Why the bank bad debts can’t be compared

And how banks decide which loans to write off …
Since the adoption of IFRS 9 in 2018 with its 'expected credit loss' framework, loan impairments are now recognised in three stages. Image: Mike Hutchings, Reuters

As at their most recent reporting periods, the country’s five largest retail banks have a total of nearly R80 billion in so-called ‘Stage 3’ expected credit losses from their loan books. This may sound very high, but total retail advances across these banks is somewhere around R2 trillion.

Now, what makes current Covid-19/lockdown-related impairments difficult (impossible?) to compare with those booked by the banks in the aftermath of the global financial crisis in 2008/2009, is that the way banks recognise credit losses in their financial statements changed from January 1, 2018.

Previously, banks were required to recognise any losses only when the “evidence of a loss was apparent” explains the Bank for International Settlements (BIS).

Under IFRS 9, however, an ‘expected credit loss’ (ECL) framework is used when recognising the impairment. This means “banks are required to recognise ECLs at all times, taking into account past events, current conditions and forecast information, and to update the amount of ECLs recognised at each reporting date to reflect changes in an asset’s credit risk”.

Under this framework, loan impairments are recognised in three stages.

Read: Redirect the focus of exec remuneration at banks and maybe save SA

Stage 1

The BIS says banks need to recognise any possible expected credit losses within 12 months at the point the loan is disbursed. This same philosophy applies on “subsequent reporting dates”, where the 12-month view applies to “existing loans with no significant increase in credit risk since their initial recognition”. Advances in this category could be considered “performing”, with a typically modest impairment charge booked. Interest revenue is calculated on the “loan’s gross carrying amount”.

Stage 2

It is in stage 2 where things become complicated. Here, if a “loan’s credit risk has increased significantly since initial recognition” and is no longer “considered low”, lifetime expected credit losses are recognised (not just the next 12 months). By definition, credit loss ratios for this category of loan are significantly higher than those in Stage 1 as there is either medium or temporary risk. Interest revenue is calculated in the same way as Stage 1.

Stage 3

These are loans where the credit risk has “increased to the point where it is considered credit-impaired”. Nedbank describes this as “any advance or group of loans and advances that has triggered the Basel III-definition of default criteria, in line with the SA banking regulations”. It adds that: “At a minimum a default is deemed to have occurred where a material obligation is past due for more than 90 days or a client has exceeded an advised limit for more than 90 days. A Stage 3 impairment is raised against such a credit exposure due to a significant perceived decline in the credit quality.” In this case, “interest revenue is calculated based on the loan’s amortised cost” (in other words, the “gross carrying amount less the loss allowance”).

With the impact of Covid-19, as well as the relief provided by banks, classifying loans into these various categories has been critical for banks. At the release of its interim results, Standard Bank summarised how it has treated credit across its retail book, based on “IFRS 9, Covid-19 client relief and restructures guidance notes and internal models”, with a simple decision tree.

Source: Standard Bank H1 2020 results presentation

Under this framework, a full loss of income due to Covid-19 is actually simple to classify and account for. Similarly, performing loans under Stage 1 are equally simple to classify and account for. All other loans, with either temporary or medium risk, are generally then classified as Stage 2.

Unsurprisingly, Capitec provides the most detailed disclosure of its loan book across both Stage 2 and Stage 3. In its case, it has loans in Stage 2 that are up to one month in arrears, those that have been rescheduled under the bank’s Covid-19 relief schemes (but are up-to-date), and those that are up-to-date but have shown a significant increase in credit risk and where clients have applied for debt review. Loans in Stage 3 include:

  • Those that have been rescheduled under the bank’s Covid-19 relief plans, but that are up to date;
  • Those that are between two and three months in arrears;
  • Those that are up-to-date after being rescheduled;
  • Those that are up-to-date after being in arrears; and
  • Those that are more than three months in arrears.

Source: Capitec H1 2021 results

Across the five major retail banks, Capitec’s credit loss ratio for Stage 3 loans is at 71%, while the remaining four are between 38% and 48%.

Capitec’s provisioning may seem high, but it has always been the most aggressive.

Its total credit loss ratio (net impairment charge to average gross loans and advances) is 8.1% for the six months ended August 31. At the end of February, it was 6.3%.

Retail business banking Absa Capitec FirstRand* Nedbank Standard Bank
Stage 1 Advances R427.6bn R37.3bn R330bn R292.1bn R480bn
Provision (ECL**) R4.581bn R3.303bn R3.7bn R2.635bn R3.3bn
Credit loss ratio 1.07% 8.9% 1.1% 0.90% 0.7%
Stage 2 Advances R57.4bn R10.3bn R35bn R43.3bn R76bn
Provision (ECL) R6.497bn R3.111bn R4.28bn R3.263bn R7.4bn
Credit loss ratio 11.32% 30% 12.2% 7.54% 9.7%
Stage 3 Advances R48.6bn R15.88bn R33bn R29.5bn R44bn
Provision (ECL) R21.744bn R11.352bn R14.25bn R11.22bn R21.2bn
Credit loss ratio 44.75% 71% 43.2% 38% 48.3%

* FirstRand calculations are author’s own from financial statements; includes FNB home loans, Wesbank Vehicle & Asset Finance, FNB Card, personal loans

** ECL = expected credit loss

Listen to Nompu Siziba’s interview with TransUnion SA director Carmen Williams (or read the transcript here):



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Great insights! So this validates the 50% drop in bank share prices and further implies that current bank stock prices are not bargains, but in line with fair value a year ago. Local economic conditions will deteriorate further and will put banks under more pressure. We haven’t seen anything yet. So bank share may look attractive right now, but is actually a value trap….

And they do not pay dividends during Covid-19 either.

With the exception of Capitec, why hold financial shares?

These initial defaults are from individuals and entities who were already teetering on the edge of insolvency.

Within the next year, those that have been operating at a marginal profit will be sucked over the brink.

Then the credit crunch will begin in earnest and aseet values will be crushed like nobody’s business.

The ultimate winners under the current status quo will be these blood suckers.

They will repossess the underlying assets at fractional costs and start advancing them back at their extortionate fees and rates structures.

Will the lemmings be taking loans to advance their wildest delinquent dreams again or can we grow into our environment and go organically?

End of comments.



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