How big might bank losses be?

AFTER-EFFECTS: MEANINGFUL FORECASTS DIFFICULT, BUT PERHAPS R35BN COLLECTIVELY

Lenders will find it difficult to deal with increased provisions.

While bank bosses have cautioned that it remains far too early to forecast the impact of the lockdown and the Covid-19 pandemic on profits and balance sheets, at least one credible model has been published in the public domain.

The difficulty, for now, is that banks don’t have enough data to give a real indication of stresses across the economy.

In a webinar last week, Peter Attard Montalto, head of capital markets research at Intellidex, spoke of a “grinding crisis” and highlighted that this was “not a normal shock”. And although certain quarters, including Cabinet ministers, speak of a short, sharp V-shaped recovery, there is a growing realisation that this is likely not going to be the case.

There is a temptation to look back at the global financial crisis and its after-effects as a guide, but this is a different crisis.

We have no recent experience of what happens when you shut down an economy for a month, nor what the impacts are of the prolonged closure of certain sectors, such as hospitality and airlines.

As China emerges, data points there are useful but come with health warnings about the accuracy of the numbers. However, we are going to need to see the trend in different economies before being able to forecast how this plays out in South Africa across the remainder of the year.

A large positive is that the country’s banking sector has entered this environment “significantly stronger than when we entered the global financial crisis”, said Mike Brown, chief executive of Nedbank Group. Balance sheets were in much better shape and Nedbank’s core equity tier 1 (CET1) solvency ratio is 40% higher than it was in 2008.

But as he highlighted in an update last week, the macroeconomic environment was likely to be “more challenging” than it was just over a decade ago. At this stage, he said, it was “not possible for anyone to forecast or predict outcomes”.

Under pressure

Intellidex chairperson Stuart Theobald made the point that this pandemic had created, “in a sense, a financial crisis on top of an economic and health crisis”.

Banks were under extreme pressure. He said there would be two drivers of increased provisions: first, the impact of a deteriorating economic environment and loan book; and second, the implementation of (International Financial Reporting Standards) IFRS 9. He added that it was not a stretch to see a return to the levels of provisions we saw during the financial crisis (4% of their books increasing to 6%).

Along with this, there would be a “fall in new business flows on the noninterest revenue side of the income statement”.

In its baseline model, Intellidex sees a total cost to banks of R120.7 billion. In this instance, it factors in 5% of banks’ books taking up the 90-day forbearance (payment holiday) option, with new provisions of 20% being raised on these loans. On the remainder of lending books, it sees new provisions of 2% being raised. On the noninterest revenue side of the equation, it has used a 10% decline in the baseline model.

“That’s going to leave the banking sector in a loss position overall of R35 billion. That R35 billion is accommodated within the Reserve Bank’s capital adequacy changes,” said Theobald.

Theobald noted that there was still “extreme uncertainty”. How banks were going to deal with increased provisions was going to be very difficult.