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South African banks have made their provisions for difficult days. Now, they must wait and see if the funds set aside will be enough to manage a potential torrent of bad debt and ease the pressure on their earnings in the coming months.
The country’s so-called “Big Four” saw an earnings drop deeper than that seen during the global financial crisis in the six months ending in June after a surge in credit impairment charges as they grappled with the effects of the pandemic. of coronavirus and a national lockdown.
Its return on equity fell to 9.2% from 15.4% a year earlier, according to data from the Reserve Bank of South Africa.
A PwC report, covering the results of Standard Bank Group Ltd, FirstRand Ltd, Absa Group Ltd and Nedbank Group Ltd, estimates that their charges soared by a combined 130% in the first half of 2020 over the previous year, while that earnings before provisions grew 4.4%.
Front-load credit impairments should help banks perform better in the next six months as they move through the additional fallout from Covid-19.
Lenders must contend with an economy in its longest recession since 1992, leaving customers more vulnerable to unemployment. Unemployment likely rose to 35% in the second quarter, according to a Bloomberg survey of economists.
Here are the views of some investors and analysts on the outlook for the sector:
Neelash Hansjee, Portfolio Manager at Old Mutual Investment Group:
Despite their high provisions, the banks “are still making a profit, they still have strong capital levels, they still have a lot of liquidity.”
“If you look at the recent activity after the crash, there is an improving trend.”
The write-offs in private equity investments reflect a difficult economy “on the ground.”
Earnings before provisions at Absa “are certainly the most surprising and showed that management has been on the right track,” while Nedbank reflected a challenging period.
Nolwandle Mthombeni, analyst at Mergence Investment Managers:
Getting return-to-equity ratios back to decent levels will be key to boosting valuations in the industry. To raise ROE, banks must ensure that the result in the coming months is “better than the worst-case scenarios they have included in their models.”
“They have packed supplies for a rainy day. If the rainy day doesn’t come, then all those provisions will be released and that will make a big difference and a big change in earnings. “
Jan Meintjes, Portfolio Manager at Denker Capital:
The major banks have approached provisioning differently, but neither method is wrong. Those that advanced provisions more aggressively, such as Absa and FirstRand, will likely show lower credit costs in the future.
“The banks showed once again how well capitalized they are. All of them showed through different stress scenarios that it is very unlikely that any of them will need to raise capital to overcome the impact of the pandemic ”.
Renier de Bruyn, analyst at Sanlam Private Wealth:
Banks have weathered the market dislocation caused by the virus crisis well, with the support of the South African central bank, with “the liquidity in the system normalized and without a material default of the counterpart in commercial operations”.
Lenders are accepting the impact of restrictions to contain the spread of the coronavirus on credit losses.
Arguably the effect has been delayed by the aid programs offered by the banks. “The next six months will provide more clarity on how relief customers have restarted payment.” This “has generally started well, while lower interest rates are helping clients as well.”
“The industry should remain profitable through 2020, while the suspension of dividends and slower loan growth should further help maintain capital ratios.”
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