Lockdown hits FirstRand and Absa earnings hard

Two of the country’s largest banking groups says earnings will fall more than a third on a like-for-like basis for the year to end-June due to rising bad debt expenses linked to Covid-19.

FirstRand and Absa provided trading updates on Wednesday warning investors of falls in earnings attributable largely to the economic fallout associated with the hard lockdown that began in late March.

The announcements follow that of Standard Bank, which flagged a drop of as much as 50% in first-half profit, an estimate that accounted for R3bn set aside by insurance arm Liberty Holdings to absorb claims related to the pandemic.

Absa said that its earnings for the six months to end-June would be 92%-97% lower owing largely to bad-debt write-offs and provisions being four times higher in the current period than in the first half of 2019.

Rival FirstRand’s update for annual results to the end of June were not quite as grim, but baddebt provisions would “result in credit-loss ratios exceeding those experienced during the global financial crisis”.

In relation to the previous year’s headline earnings per share of R4.97, FirstRand’s 2020 earnings would fall 35%-45%, weighed down by the absence of R2.3bn proceeds from the sale of its Discovery Card business a year ago.

Stripping out the effect of the Discovery Card sale, headline earnings — the widely watched measure of a company performance that strips out certain one-off items — would fall 27.4%- 37.4%

“Since the beginning of lockdown in March 2020, underlying customer income and affordability in FirstRand’s retail, commercial and large corporate segments have deteriorated sharply, particularly in those sectors most affected by the lockdown restrictions,” the group said.

To put bad-debt write-offs in context, FirstRand generated earnings per share of R2.49 for the six months ending December 2019. In the updated provided on Wednesday, it said it expected full-year earnings of R2.73 to R3.23, indicating that much of the second half’s earnings would be extinguished by the rising bad-debt provisions.

The group, which consists of brands such as FNB, Wesbank and Rand Merchant Bank, said that the lower levels of economic activity associated with the pandemic and lockdown restrictions “are expected to continue for some time”.

Consequently, the group had lowered its GDP forecast to negative 8% for 2020, which would be characterised by “a significant increase in unemployment and weakness in property markets”.

FirstRand CEO Alan Pullinger told Business Day earlier this year before the pandemic arrived that “the economy was on its knees”, and recovering from the damage could take anywhere from three to five years.

FirstRand said that lower earnings would also be the result of “subdued” noninterest revenue due to lower transaction volumes during the lockdown period, and “depressed” new business origination.

FirstRand’s share price was 0.46% weaker at close of trade on Wednesday at R38.57 per share while Absa’s had fallen nearly 1% to R78.14 per share.

BAD-DEBT PROVISIONS WILL RESULT IN CREDIT LOSS RATIOS EXCEEDING THOSE DURING THE GLOBAL FINANCIAL CRISIS