SA banks absorb Covid shock waves
The banking sector was badly hit by credit losses, but strong capital buffers kept it from spiralling
Despite recording massive drops in their earnings in 2020, South Africa’s largest banks have avoided a total meltdown.
The country’s banking sector is resilient, a fact that allayed early fears they may not be able to withstand the Covid-19 shock to the economy. A banking sector crisis would have a knock-on effect that would send the country’s financial stability into a tailspin.
In its May 2020 edition of the Financial Stability Review, the South African Reserve Bank noted that profits would likely be under strain as a result of the pandemic. A later edition of the review noted that during the lockdown profit declines in the banking sector reached lows previously reported eight years ago.
The review added, however, that South Africa’s biggest banks “hold sufficient capital buffers to withstand a macroeconomic shock of unprecedented severity”.
Resilience was the message in the last two weeks, as some of the country’s biggest banks released their full-year 2020 financial results. This is despite the still treacherous conditions that saw South Africa’s economy shrink by 7% last year.
The banking sector was, however, not spared from the onslaught. Standard Bank, Absa and Nedbank all recorded massive declines in their headline earnings. Earlier this month FNB’S parent company, Firstrand, reported a 21% decline in headline earnings in its interim results for the six months ended on December 31.
The main culprit for declines in earnings were credit impairments, which rose as banks restructured some loans and offered repayment holidays to their struggling clients.
As the country’s fourth-largest bank, Nedbank’s earnings were the hardest hit, falling 57% from figures recorded in 2019.
In his message to shareholders, Nedbank chief executive Mike Brown said that despite unprecedented challenges, the sector and Nedbank “demonstrated strong levels of resilience and was able to support clients while remaining well capitalised, liquid and profitable, albeit at levels lower than in the prior year”.
Despite a strong liquidity position, Nedbank, like Absa, decided not to declare a final dividend for 2020 owing to uncertainty about the progression of the virus and the effectiveness of the vaccine roll-out.
Nebank’s liquidity coverage ratio (LCR) — which requires banks to hold cash or assets that match or exceed projected cash outflows over a 30-day period — was 126%. This was 11% higher than in the first half of the year.
Last year the reserve bank lowered the regulatory minimum for the LCR from 100% to 80%. This change was aimed at making it possible for banks to continue lending amid expected liquidity shortages and a rise in defaults. The objective of the LCR is to promote the short-term resilience of the liquidity risk profile of banks.
Similarly upbeat sentiments were expressed earlier in the week, when Absa chief executive Daniel Mminele presented the bank’s results. Absa’s LCR was 121% at the end of 2020.
Absa fared better in the second half of the year, Mminele noted on Monday. The bank’s earnings fell by an alarming 82% in the first six months of 2020 but by the end of the year were down by 51%.
Jeremy Gorven, a senior analyst at investment firm Stonehage Fleming, said the suspension of dividends and the fact the banks remained profitable helped them through 2020. Standard Bank and Firstrand have recently decided to declare dividends following betterthan-expected results.
The average return on equity for the 2020 financial year was 6.9%, Gorven noted. “That’s much lower than it usually is. But it is still positive, which means without paying dividends, banks are adding to their capital.”
Gorven added that the recovery of economic activity in the second half of 2020 and slower growth in credit losses have helped the banks rebound.
“So in general the outlook is positive for profit growth and returns. But that doesn’t mean the banks will be earning the same returns pre-pandemic. What we will see is uneven recovery and it may take some time.”
Conrad Beyers, the Absa chair in actuarial science at the University of Pretoria, said the results from the banks are much better than was feared when the pandemic hit. The university has conducted high-level stress testing of South Africa’s largest banks.
“One should of course add that banks are still in a very tough and uncertain position,” Beyers added.
But, he added that the expectations had been “really bad”.
“There might have been a possibility of a crisis. So currently those expectations have not been realised,” he said.
“It does not mean it is a rosy picture, or really positive. They lost a lot on credit impairments, which is extremely bad … But at least it appears that the banking system is going to survive — at least for now.”
The state bodies charged with investigating and prosecuting commercial crimes in South Africa have seen a more than 30% increase in budget allocations over the past five years. But they claim this has not been enough.
Looking at the overall budget, funds to keep the peace and provide security in South Africa commands 12.1% of the total budget.
Though smaller than the budget for the learning and culture cluster, which is at 23.5%, it’s close to that of health, at 14% and economic development, at 12.2%
The security arms, such as the National Prosecuting Authority (NPA), have previously complained of not having enough money and resources to prosecute criminals.
On Tuesday, while addressing the parliamentary portfolio committee on justice and correctional services, NPA head Shamila Batohi said that “we will never have enough resources, that is why I raised the issue of prioritisation”.
General Godfrey Lebeya, the national head of the directorate for priority crime investigation (DPCI), or Hawks, said his directorate was operating with a 47% staff complement and needed more employees, but added that the DPCI was working to hire more people.
Lebeya said his department had 21 000 cases with fewer than 2 000 investigators dealing with them. Of those cases, 11 000 accused people are currently on the court roll.
However, these problems have hampered the entities’ abilities to solve cases such as the Steinhoff saga.
It has been four years since the matter was reported to the police, and so far, there are no signs that investigators are narrowing in on the culprits or that arrests are imminent.
Instead, early this month, it came to light that last year, Steinhoff paid R30-million to fund Pricewaterhousecoopers (PWC) to further investigate the disgraced company on behalf of the South African Police Service (SAPS), the Hawks and the NPA.
PWC has previously probed the matter. In 2017, after the news broke, Steinhoff appointed the audit firm to investigate the irregularities. When the report was concluded two years later, the Hawks and the NPA were given access to it.
Last week, the NPA’S Sipho Ngwema said it was distancing itself from the matter. He said the funding of the forensic investigation fell squarely within the domain of the SAPS.
However, the SAPS did not respond to why it needed the R30-million from the company it is investigating.
Though the NPA’S financial woes stretch back more than a decade, Steve Mahlangu, speaking on behalf of the department of justice and constitutional development — which oversees the NPA — attributed its challenges to the economic downturn that has affected the government’s purse overall.
He added that the NPA’S and the justice department’s work was labour-intensive. As a result, the most significant portion of the budget was used for employee compensation and personnel expenses.
How SAPS spends its budget
SAPS, however, is another matter. A deep dive into the financials by the M&G Data Desk shows that it’s trialready dockets for commercial crimes have decreased steadily.
Treasury documents and SAPS’ annual reports over the past five years show that the department received a total of R504-billion to R503-billion over the past five years, with the highest spend in 2019-20 at R96.7-billion.
The SAPS budget has increased by 33%, from R73-billion in 2014-15 to R96.7-billion in 2019-20.
However, the department of justice and constitutional development has received a smaller piece of the pie. In the past five years, it has received R108-billion with an annual average of R18-billion. This department’s budget, however, has increased over this time by 36%, from R14.9-billion in 2014-15 to R20.3-billion in 2019-20.
The NPA has received more than R21-billion from the government in the last five years.
Although Finance Minister Tito Mboweni’s 2021 budget has cut money allocations across departments, SAPS’ expenditure is expected to increase at an average annual rate of 5.2%, from R96.7-billion in 201920 to R112.7-billion in 2022-23.
However, looking at the SAPS annual reports for 2019-20, the department confirmed fruitless and wasteful expenditure amounting to more than R91-million. In its annual report of 2018-19, an irregularity expenditure of R20.7-million had been reported, but that had escalated to R1.2-billion during the audit.
A closer look at their annual report for the period using Vulekamali — a platform by the treasury and civil society — showed that SAPS’ administrative programme budgeted more than R322-million on fleet services and just over R4-million.
In the same period, the department’s administration programme had budgeted R21-million on catering, while the detective services budget came in at just more than R4-million.
More money, more woes
Kirsten Pearson of Corruption Watch said that SAPS’ budget has been substantial. She added that the country was at a place where austerity is affecting the economy, but the department had received billions every year.
She said slow action in the Steinhoff matter was a case of misplaced priority, and a reflection of the extent to which criminal justice had been eroded as well as how political influence had affected SAPS’ ability to carry out investigations.
Pearson said the German government had made strides in the matter while South Africa was lagging.
In early March, Bloomberg reported that Steinhoff International Holdings chief executive Markus Jooste was among four people charged in Germany in connection with accounting violations.
Pearson explained that the NPA was in this situation because it was reliant on the chain of investigation of other bodies.
On Wednesday, while briefing parliament’s oversight committee on public accounts, Batohi said that the PWC ‘s report is due to be released at the end of this month and it “will make a huge difference in terms of moving this case forward.”
Not the only unresolved case
Last year’s SAPS financial report shows that the percentage of trialready case dockets for serious commercial crimes charges decreased by 10.58 percentage points from 74.37% to 63.79% from the previous year.
It said the decline was due to witnesses in municipal fraud and corruption investigations who are sometimes reluctant to come forward or hand over evidential material, delays in the finalisation of forensic audit reports and some delays in case dockets submitted to the NPA for a decision, due to the high volume of cases.
“The underperformance can be attributed to the complexity of serious commercial crime case dockets. There is ongoing consultation between the DPCI and NPA, to resolve the difference in the threshold for serious commercial crime cases,” the report added.
The treasury, which is focusing its efforts to stabilise the country’s debt by limiting spending, told the M&G that funding alone would not solve corruption in this country.
“Funding must also be complemented with consequence management, among other things.”
Budget cuts to the department of labour’s inspectorate have sparked concerns that “unscrupulous employers” will go unchecked while workplace safety deteriorates.
All eyes have been on the Commission for Conciliation, Mediation and Arbitration (CCMA) since it emerged it will have R600-million slashed from its budget over the next three years.
But the CCMA is not the only corner of the department concerned about the effect budget cuts will have on operations. The labour inspectorate — which is tasked with weeding out employers who fail to keep their workers safe — had more than R63-million cut from its budget last year. And it won’t be getting that full amount back in the near future.
Labour inspectors visit workplaces to investigate complaints and to make sure they comply with labour laws, such as the Occupational Health and Safety Act and the Basic Conditions of Employment Act.
In 2019, the Mail & Guardian reported on how the inspectorate helped bust a blanket factory in Johannesburg called Beautiful City. Inspectors found that workers, some of them under the age of 15, were forced to work under dreadful conditions and earned only R6.50 an hour. One worker had one of his fingers cut off, another had his hand burned and a third was losing his eyesight.
When Covid-19 hit South Africa’s shores a year ago, the inspectorate received a wave of complaints by workers that their bosses were not complying with pandemic-related protocols put in place to stop the spread of the virus in the workplace. Inspectors conducted 24 252 health and safety checks and the overall compliance rate was only 56%.
Despite the department receiving a boost to its budget last year, the department’s director general Thobile Lamati said the subsequent cut may mean that inspections will have to be scaled down.
Lamati said though the initial budget cuts were not felt in 2021 — because of decreased travel costs — this will likely change as the economy re-opens and inspectors are expected to work at their full capacity. Last year, the department decided to reduce its inspection targets by 15%.
In the 2019-20 reporting period, the department’s target was to inspect 220 692 workplaces in total. After reducing its target, it would have been expected to conduct 187588 inspections.
“The implication of that is we will visit fewer workplaces,” Lamati said, adding that vulnerable workers will be exposed to “unscrupulous employers” as a result.
Future financial restrictions also means that the department will have to scale down its outreach campaigns, Lamati said.
The department had plans to train more inspectors specialising in enforcing employment equity targets, set to ensure all workers receive equal opportunities and that they aren’t discriminated against.
Forthcoming amendments to the Employment Equity Bill empower the department to exclude noncompliant businesses from doing business with the state. But there are currently only nine inspectors in the country who specialise in employment equity. Prior to the pandemic, the department advertised 500 new inspector posts. But according to the deputy director general in charge of inspection and enforcement services, Aggy Moiloa, not all these inspectors are out in the field yet.
According to the treasury’s budget document for the department, there will also be personnel cuts to the inspectorate in the medium term. By the 2023-24 financial year, there will be 112 fewer people working for inspection and enforcement services.