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The outlook for South African banks is increasingly bleak amid the growing threat of a second wave of coronavirus that could disrupt an improvement in economic activity.
“With Covid cases in Europe, the United States and now South Africa increasing, the great fear for banks is to suffer some kind of lockdown again,” Kokkie Kooyman, portfolio manager at Denker Capital in Cape Town, said by phone. “What is bad for the economy is risky for the banks.”
Africa’s most industrialized economy is in recession and unemployment is at its highest level in 17 years. That follows restrictions in the second quarter that shut down everything but essential services.
While most clients are paying off their debt, a resurgence of cases in the Eastern and Western Cape provinces is fueling speculation in local media, such as News24, that some regions face lockdowns, which could cause loans begin to deteriorate again.
For Standard Bank Group Ltd., the continent’s largest bank, launching vaccines could take time and the risk of “pandemic fatigue” could cause security breaches during the holidays.
“There remains considerable forecast uncertainty and risk,” Standard Bank CFO Arno Daehnke said in a call.
The Johannesburg-based lender is issuing a “warning” in its comments on its outlook because new lockdown restrictions “will be very damaging for South Africa.”
Absa Group Ltd. CEO Daniel Mminele sees “risk everywhere” even though his earnings, like Standard Bank’s, have benefited from faster growing markets on the rest of the continent.
Many governments still have fiscal and debt challenges to face, he said.
‘Too early’
“It is too early to determine whether we have backed it,” the chief executive of South Africa’s third largest bank said on a conference call.
Local banks could certainly benefit from a global recovery triggered by advances in vaccines, stronger commodity prices and a firmer rand, JPMorgan Chase & Co. strategist David Aserkoff said in an interview.
While an interest rate cut can hurt earnings, investors are more concerned about the likelihood of dividends, “the cost of risk, bad loans and the future growth trajectory of the economy,” he said.
The central bank expects the South African economy to contract 8% this year and then recover to 3.5% and 2.4% in the next two years.
Standard Bank said on Monday that full-year earnings will fall more than 20%, echoing a previous forecast from Nedbank Group Ltd. Absa said its earnings could decline more than 40%, while FirstRand Ltd. expects a drop of up to 25% in the six months through December.
“None of the updates seem so optimistic,” Kooyman said. Denker Capital’s base case is that banks can see improvements starting in March. “So you still have these four months of risk.”
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