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A startling contrast between Absa and Nedbank (or not?)

Dig into the details and it’s clear: the credit cycle has turned….

On a headline basis, financial results from Barclays Africa Group and Nedbank Group for the first six months of 2016 would have you believe these two banks are operating in two different markets and economies entirely. The former reported a credit loss ratio of 1.29% (from 0.97% in June 2015), while the latter described an improvement to 0.67% (from 0.77% 12 months prior). In other words, for every R100 lent across the business, Barclays Africa expects to not recover, on average, R1.29; Nedbank, 67c.

Credit impairments at Barclays Africa were up 46% to R5.197 billion, while at Nedbank these declined by 4.2% to R2.2 billion. Strip out a R1 billion impairment (R999 million) in Barclays Africa’s investment bank, “due to single names in the consumer and natural resources sectors” and you still get an increase (could one call this ‘normalised’?) of 18%.

Analysts suggested on Friday that Barclays Africa Group was being too conservative. But, following Nedbank’s numbers on Monday, all listed banks rallied strongly.

Now, Bloomberg’s Matt Levine argues (strongly) that “A bank is a collection of reasonable guesses about valuation. It is a purely statistical process. There is no objective reality. At best, there is a probability distribution, a reason to reject the null hypothesis with some level of confidence”.

Impairments (whether specific or portfolio) are similarly, one could argue, a collection of reasonable guesses. Be too conservative at a given point in the cycle and your earnings take an unnecessary hit, but if you’re not aggressive enough, you’re in for a fair amount of (unnecessary) pain in six months’ time.

Despite the fact that bank impairments (and valuations of assets, and earnings) are a relatively “arbitrary point on a distribution” as Levine maintains, the two sets of divergent data from Nedbank and Barclays Africa over the past week are difficult to reconcile.

That is, until you dig into the detail. Consumers, specifically, are struggling.

Nedbank

June 2016

June 2015

Change

Corporate and Investment banking

R502m

R536m

(6%)

Retail and business banking

R1773m

R1686m

5%

Retail banking

R1655m

R1523m

9%

Business banking

R118m

R163m

(28%)

Wealth

R24m

R22m

9%

Rest of Africa

R63m

R64m

2%

Centre

(R151m)

(R1m)

 

Barclays Africa Group

June 2016

June 2015

Change

Corporate and Investment banking

R1383m

R238m

481%

Retail and business banking (SA)

R3209m

R2791m

15%

   Retail banking (SA)

R2878m

R2540m

13%

   Business banking (SA)

R331m

R251m

32%

Wealth (WIMI)

(R2m)

R3m

Rest of Africa

R646m

R408m

58%

Centre

(R39m)

R110m

At the release last Friday of the Barclays Africa Group interim results, chief executive Maria Ramos said that the bank had “noted in March that the credit cycle had turned” and that it is “starting to see rising impairments across a number of portfolios, notably in South Africa Home Loans”. Nedbank, on Monday, also pointed to an “increase in CLRs [credit loss ratios] within home loans”.

Yes, the quality of Nedbank’s and Barclays Africa Group’s books are different, but there are some visible trends (as you’d expect across such large bases).

The curves for the two banks’ credit loss ratios (CLRs) for both home loans and vehicle and asset finance look practically identical (aside from that one anomaly reported by Barclays Africa Group in June 2015).

Banks 1 Banks 2

Source for both: Data published in financial statements.

Both have also seen an uptick in CLRs in their card books in the last six months.

Similarly, Barclays Africa Group’s CLR for Personal Loans in SA (Absa) has ticked up in the last half-year. Nedbank’s, however, remains on a downward trajectory. By its own admission, it ‘took the pain’ in personal loans earlier than most. An uptick in December – certainly not beyond the realms of possibility – would be reason for concern.

 

June 2014

Dec 2014

June 2015

Dec 2015

June 2016

Nedbank Card

5.56

4.84

5.83

5.12

5.86

Absa Card

7.64

6.19

6.21

5.38

5.95

Nedbank Home Loans

0.22

0.09

0.04

0.06

0.19

Absa Home Loans

0.45

0.38

0.25

0.30

0.44

Nedbank VAF (MFC)

1.33

1.21

1.03

1.06

1.32

Absa VAF

1.11

1.02

1.09

0.97

1.13

Nedbank Personal Loans

10.75

10.02

8.12

7.48

7.01

Absa Personal Loans

6.93

6.50

5.43

5.16

5.85

 

 

June 2014

Dec 2014

June 2015

Dec 2015

June 2016

Nedbank Group

0.83

0.79

0.77

0.77

0.67

Retail (SA)

1.90

1.70

1.44

1.34

1.49

Barclays Africa Group

1.01

1.02

1.11

1.05

1.29

 South Africa

1.17

1.00

1.06

0.97

1.23

 Retail (Absa, SA)

1.60

1.35

1.33

1.23

1.48

*All as reported at the time.

For its credit loss ratio, Nedbank sees the so-called “through the cycle” range in its Retail Banking business being between 1.90% and 2.60%. As at June 2016, its CLR is 1.49%. It hasn’t been at the lower end of its through the cycle range (1.9%) for 24 months, but things can change quickly.

Barclays Africa sees that large one-off hit in its investment bank not repeating in the second six months, and chief financial officer David Hodnett said on Friday that its “credit loss ratio is expected to improve from the first half, reflecting the usual seasonality and the single name in the first half”.

When Standard Bank reports H1 numbers on August 18, we’ll know just how firm the trends in (especially) home loans and vehicle and asset finance are. Just how vigorously has the cycle turned? Looking at the Transunion Consumer Credit Index for Q1, there shouldn’t be any doubt at all….

Banks 3

Source: Transunion.

* Hilton Tarrant works at immedia. He can still be contacted at hilton@moneyweb.co.za.

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Is their ever anything good to say about the ABSA group?The rot started when Barclays took over and Maria s appointment hastened the massive erosion in market share,client and staff confidence.Nedbank have many faults,but one of their strengths is that they have a clearly defined strategy and much better leadership,which has contributed a more stable operation.

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