South African banks face the steepest earnings slump in half a century — with some posting losses — as measures to curb the coronavirus drag the economy deeper into recession and lead to a surge in bad debts.<\/p>\n
\u201cI have looked at each and every crisis in the last fifty-odd years and there is nothing this severe,\u201d said Corn\u00e9 Conradie, an actuary and partner at auditing and consultancy firm PwC in Johannesburg. \u201cThe potential drop in gross domestic product is bigger than any of the previous stresses.\u201d<\/p>\n
Only one of the big four banks has reported an adjusted net-income loss since 1992, when Bloomberg began compiling data. That was in 2003, when Nedbank Group set aside more money for taxes, wrote down technology investments and changed accounting policies.<\/p>\n
Standard Bank Group reported its sole annual-profit decline in 2010 in the wake of the global financial crisis, while FirstRand Ltd.\u2019s earnings shrank in 2008 and 2009.<\/p>\n
Fast forward to this year and South Africa\u2019s GDP could contract 7%, according to the country\u2019s central bank, as government restrictions keep businesses closed and consumers at home to slow the spread of Covid-19.<\/p>\n
The outlook is so uncertain that the best estimate banks, including Absa Group, can give is that profit will be down at least 20%.<\/p>\n
Read More: Absa Warning Casts Doubt on South African Banks\u2019 2020 Dividends<\/p>\n
\u201cThe earnings for the banks to June will be substantially down,\u201d said Jan Meintjes, a portfolio manager at Cape Town-based Denker Capital. \u201cIs it going to be closer to 30%, 40% or 70%? No one knows.\u201d<\/p>\n
The banking regulator — while lauding the industry\u2019s high capital and liquidity buffers — is also bearish. On a call with investors last week, Prudential Authority Chief Executive Officer Kuben Naidoo said banks could make losses as an increase in expected loan defaults result in higher provisions.<\/p>\n
Banks are making less revenue from interest charges following a drop in benchmark rates to a record low, transactions have slowed down due to the lockdowns and a surge in job losses will make it harder for customers to repay debt.<\/p>\n
\u2018Bad Debt Experience\u2019<\/strong><\/p>\n While losses may not come in the first-half cycle, they\u2019re not completely out of the question for the second, said Meintjes. \u201cThat will be because of the reality of the actual bad-debt experience, emerging to the latter part of the year being substantially worse than what the models indicated mid-year.\u201d<\/p>\n
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