Banks’ earnings expected to slow

• Profit under pressure as buffers fall away and consumer woes go on

Earnings across SA’s major banks are expected to slow this year as restructuring, mergers and acquisitions and other corporate deals that provided a buffer against defaulting households, return to normal.

Earnings growth across SA’s major banks is expected to slow in 2017 as restructuring, mergers and acquisitions and other corporate deals that provided a buffer against defaulting households normalise.

In 2016, there was an increase in corporate activity, which had a positive effect on noninterest revenue. But the market is expecting little in the way of mergers and acquisitions in 2017. Households have come under pressure, prompting ratings agency S&P Global Ratings to keep its negative outlook on the local banking sector unchanged.

“Corporate credit growth has continually outperformed our expectations, but we don’t expect the buoyant growth seen in the first half of 2016,” primary credit analyst Matthew Pirnie said in a report.

“This is because the pockets of infrastructure development — particularly in the renewables space — and real estate deals are less attractive and the ‘into Africa’ story is less compelling.”

Corporate credit assets at SA’s largest banks — Standard Bank, Barclays Africa, FirstRand, Nedbank and Investec — stood at about R1.5-trillion in the first half of 2016.

Deals such as AnheuserBusch InBev’s R3.1-trillion takeover of brewer SABMiller, in which Standard Bank’s corporate and business bank acted as a financial adviser, helped bring noninterest revenue for the sector up to R89.8bn.

At FirstRand, cashing in its private equity investments brought in the bulk of its noninterest revenue. Nedbank experienced a bonanza, pocketing 17.8% more income from its private equity portfolio.

S&P expects banks to deliver weaker noninterest income as deal flow “moderates”.

Households are not expected to pick up the slack, with credit losses rising in 2016 as consumers came under pressure from inflation and rising interest rates. S&P expects this to continue, with credit losses ranging between 0.8% and 1% of gross loans and advances for 2017.

Barclays Africa will kick off the banking results season when it releases its financial results for the year to December on Thursday next week.

Adrian Cloete, an analyst at PSG Wealth, predicted headline earnings to be 6%-7% stronger for Barclays Africa, which reported headline earnings of R14.3bn the previous year.

Cloete expects a weaker performance from Standard Bank. “The very weak Liberty Holdings trading update means Standard Bank’s earnings estimates [for the 2016 financial year] will be reduced by around 3%-4% to only marginal growth.”

Liberty, Standard Bank’s insurance arm, released a profit warning on January 27 stating that its headline earnings might drop by up to 60%.

Nedbank is expected to produce single-digit growth.

“For Nedbank, I expect underlying single-digit headline earnings per share growth including the impact of Ecobank Transnational and therefore double-digit growth if you strip out” Ecobank for the full year.

Nedbank’s 21.8% stake in pan-African financial services provider Ecobank delivered a R431m loss in the first half of 2016, dragging down earnings.