South African Bank prof­its to slump as credit losses soar


South African banks' 1H20 re­sults will con­firm a slump in op­er­at­ing prof­its due to a surge in credit losses caused by the coro­n­avirus pan­demic, Fitch Rat­ings says.

How­ever, the re­sults are un­likely to trig­ger rat­ing down­grades un­less they are sig­nif­i­cantly worse than our ex­pec­ta­tions. We down­graded all South African banks to 'BB'/Neg­a­tive in March, re­flect­ing the likely im­pact of the pan­demic on their op­er­at­ing en­vi­ron­ment and fi­nan­cial met­rics (see here).

The sec­tor's op­er­at­ing profit fell 63.3% yoy in the first five months of 2020, with loan im­pair­ment charges of ZAR37.7 bil­lion al­ready ex­ceed­ing the 2019 full-year to­tal (ZAR34.6 bil­lion). The loan im­pair­ment charges, when an­nu­alised, were equiv­a­lent to 2.4% of av­er­age gross loans, com­pared with 1.0% for 2019, and 72% of preim­pair­ment profit, com­pared with 28% for 2019.

Fitch be­lieves South African banks are, to vary­ing de­grees, pru­dently recog­nis­ing credit losses early, which should shield their fu­ture prof­itabil­ity. The 1H20 re­sults will also show a de­cline in core rev­enue due to lower in­ter­est rates, mod­est loan growth, and sub­dued client ac­tiv­ity, but pre-im­pair­ment op­er­at­ing profit will have been helped by trad­ing gains and cost con­trol.

Banks' IFRS 9 ex­pected credit losses (ECL) be­gan to in­crease markedly in March, on the prospect of a sharp eco­nomic con­trac­tion as the pan­demic took hold. Stage 2 loans are likely to have in­creased sig­nif­i­cantly in 2Q20, which will push ECL higher as Stage 2 loans re­quire banks to recog­nise life­time ECL.

The ECL re­ported at end-1H20 will de­pend greatly on each bank's own view of the likely depth of the eco­nomic down­turn and the shape of the re­cov­ery. Fitch fore­casts that South Africa's econ­omy will con­tract by 6.7% in 2020 and then grow by 3.9% in 2021.

Stage 3 loans are un­likely to have in­creased sig­nif­i­cantly in 2Q20 given govern­ment mea­sures to sup­port both the econ­omy and bor­row­ers dur­ing lock­down, but we ex­pect them to in­crease in 2H20 as debt re­lief and other mea­sures are grad­u­ally with­drawn and some seg­ments of the econ­omy strug­gle to re­cover.

We ex­pect banks to op­er­ate with slightly lower cap­i­tal ra­tios in 2020 but to main­tain mod­er­ate buf­fers over reg­u­la­tory re­quire­ments.

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