Bad loans may top 2008 crisis — Standard
Standard Bank, Africa’s largest commercial lender, says it is bracing for an economic shock exceeding that of the financial crisis about a decade ago, expecting an earnings hit of about a fifth in the first half.
And there may be yet more pain for SA banks even after the out-sized share losses in 2020, analysts say.
The rate of writing off bad loans may exceed that of the 2008 financial crisis while credit ratios, which represent costs associated with writing off bad loans as a percentage of the average loan book of a financial institution, may exceed the 1.6% seen then, the group said.
Absa recently said that its ratio in the first four months was similar to levels from 2009.
SA banks, which operated under a stricter regulatory environment that limited exposure to exotic mortgage products that drove the crisis in the developed world, were largely insulated from the financial crisis a decade ago. They face a tougher time this time, with business failures and retrenchments hitting their clients, while the recovery in the economy and demand for loans is likely to take longer.
All the major banks have announced payment holidays and other relief measures for distressed customers. They face an uncertain outlook and questions about how long they can continue to support clients.
Even before the Covid-19 outbreak, banks were struggling in a sluggish economy that was well on its way to losing its last investment-grade rating.
Their problems have multiplied, with the Reserve Bank forecasting a GDP contraction of 7% in 2020, a loss of output it doesn’t expect to be recouped in the following two years.
The group said that it expected headline earnings per share to drop more than 20% and that it was reviewing its medium-term financial targets.
Its statement followed an announcement on Friday by Liberty, the insurer in which Standard Bank is the majority shareholder, that it was expecting profits to drop by more than 20%, both in its six-month to June and full-year to December periods.
“If the pandemic-related impacts are deeper or more sustained than currently expected, or government actions are not effective, the group’s results could vary meaningfully,” Standard Bank said on Monday. “The group is reviewing the group’s medium-term financial targets and will provide an update as and when able to do so.”
Banks have been among the hardest hit on the JSE during 2020, with the index down 43%, compared with an 11% drop for the overall market.
Standard Bank shares shed 5% on Monday to trade at R96.50, taking their 2020 loss to almost 43% in line with the bank
index. Nedbank has lost 55%, while FirstRand is 35% lower since the end of 2019.
Even with those losses, it was too early to gauge if the sector offers value, said Adam Ebrahim, founder of Oasis Asset Management, who has Standard Bank as his top pick.
“We are waiting to see what the industry reports for the half year ending June, because we think the market is too optimistic about earnings. Thus far the banks have been accommodating with the relief they have provided, but at some point down the road, they can no longer afford to be accommodating.”
The current crisis is worse than ’in s entire 2009 lending as this time book the is bank under pressure, said Mergence investment analyst Nolwandle
Mthombeni. There were also doubts about an economic recovery, which after 2008 had been rather rapid, she said.
Standard Bank said its personal and business divisions had provided R92bn in relief to individuals and businesses in SA across 285,000 accounts by May 28. In the rest of Africa, this stood at R11bn across 14,000 accounts.
The closure in April of deeds offices and dealerships halted mortgage disbursements and resulted in a more than 70% decline in vehicle and asset finance loans compared with the previous month. ATM and branch volumes were down 38% and 61%, respectively.
“While there has been an improvement in activity levels during the course of May, they remain below those seen before the lockdown,” Standard Bank said.
WE ARE WAITING TO SEE WHAT THE INDUSTRY REPORTS FOR THE HALF YEAR BECAUSE WE THINK THE MARKET IS TOO OPTIMISTIC