ANALYSIS | How banks were battered in 2019

As the last of the Big Four banks in South Africa presented financial results this week, it became clear that no one was spared from the bruises the stagnant economy left on the sector.

Of the four, Nedbank performed the worst in terms of earnings as it recorded a 7% decline for the 2019 financial year. Absa and Standard Bank reported a meagre 1% growth and FirstRand was above the pack with a 5% growth in earnings. Accounting and consulting firm PwC has crunched numbers and concluded that combined, the Big Four grew earnings by 2.1% in the 2019 financial year, noticeably below the 8.7% they achieved in 2018.

PwC Africa's financial services leader, Costa Natsas said the lower growth in profits is not surprising, considering that banks' financial performance is closely aligned to the economy, which Statistics SA recently revealed only grew by 0.2% in real terms in 2019.

"CEOs have cited that due to the weaknesses in the SA economy, the slow pace of structural reform and the pressures on the consumer, bank results in SA will be dampened. From a broader macro perspective, significant volatility in some of the African operations also contributed to the downward pressure on earnings," said Natsas.

The impairments curse

But the gloomier picture was in the other numbers, particularly impairments and credit loss ratios, which increased across the board. The increase in these two measures was partly a function of the new accounting standards which require banks to make more provision for bad debt when they grant new loans. So, banks who grew their loan books substantially, such as Absa, had to book higher impairment charges.

But the other side of the surging impairments story is that consumers are not coping with their debt repayments. Nedbank’s impairment charge jumped 66% in the years ended in December. Absa’s credit impairments grew by 24%. FirstRand’s 18% rise in impairment charge housed a 77% jump in impairments in FNB’s credit card business and 47% in personal loans. And Standard Bank recorded a 23% rise in credit impairment charges, albeit off a low base.

Could the banks have done anything differently to avoid these credit losses and will they tighten their lending taps after this?

"In the context of the weak economic environment over the past 6-9 months, there is not much banks could have done to ease the burden on consumers," said Sameer Singh, research analyst at Old Mutual Wealth Private Client Securities.

Will Capitec buck the impairment surge trend?

While Capitec seemed to have a better handle on bad debt when it reported its results for the financial year ended in August 2019, Singh said because its numbers covered up August 2019, whereas the other banks reported until December 2019, it remains to be seen if anything has changed since the as South Arica’s GDP contracted over the last two quarters of 2019. The bank which reported a 17% decrease in its credit impairment charge in August 2019 will present its latest results on 14 April.

"Capitec might have missed some of the weakness towards year end. That being said, over the last two years Capitec have adopted a strategy to improve their client credit quality, which itself supports better quality loans for customers. To do this they tightened their credit criteria which saw improved arrears performance," said Singh.

Should and will banks lend less now?

Singh said despite these eye-popping increases, most of the bank’s credit loss ratios are still within their "acceptable" target ranges and grew off low bases.

"Secondly, the rate of growth in bank advances, on average, showed signs of slowing through 2019, suggesting banks were cognisant of the potential for heightened credit risk and therefore raised their lending standards," added Singh.

And that’s indeed what Absa did. The bank’s financial director, Jason Quinn, said Absa the bank proactively reduced approval levels in some areas. "In response to the macroeconomic environment, we’ve constrained our approval rates towards the end of the year," said Quinn in relation to Absa’s personal loans business.

Natsas said banks can pull back on the supply of loans if the level of risk they’ve assumed gets beyond their appetite. "We have already seen some of the banks indicating that they are tightening their credit requirements for loan originations in certain portfolios, specifically in the personal loan and credit card space," he said.