Standard kicks off ugly ‘big 4’ reporting season
● Standard Bank opens the “big four” banks’ reporting season this week, after warnings by the institutions that their results will be ugly, with higher bad debts and lower interest rates and business volumes driving earnings down by anything from 30%-90%.
And though the banks have done much to support customers during the lockdown, concern is mounting that the steep bad-debt provisions they are being forced to make in terms of new accounting rules — along with the increasing sums they are putting into the bond market to help fund the government’s fiscal deficit — could see them put the lid on lending at a time when the economy most needs them.
Three of the big four have issued updated trading statements in the past two weeks, with Standard Bank warning that its headline earnings for the six months to end-June would be between 30% and 50% lower than a year ago, and Absa saying its normalised headline earnings per share for the six months would be 80%-85% lower.
The lockdown and the weak economy had an impact on customer loan and transaction volumes and reduced its net interest margin, Absa said, but while it still grew profits before bad debt provisions thanks to cost cuts, impairments for bad debt were four times higher than a year ago.
FirstRand, which reports for the full year to June, said its headline earnings would be more than 20% lower and the main driver was the higher bad debt charge, driven mainly by the group’s forward-looking assumptions.
The market will be watching closely to see to what extent banks have already seen individual, business and corporate customers default on loans, and how much they have provided for expected future bad debts.
The IFRS-9 accounting standard requires them to take a view on what might happen over the life of the loan and set aside provisions against anticipated future bad debts.
One credit analyst said auditors have put pressure on banks to be particularly conservative in providing for expected bad debts.
This is even though the banks have provided more than R40bn of payment breaks and debt relief on about R600bn of gross loans to customers since the crisis started.
This is about 8%-10% of their total loan book, in line with advanced countries, though some developing countries have seen ratios as high as 20%-30% of their loan books, said Prudential Authority CEO and Reserve Bank deputy governor Kuben Naidoo, who regulates the banks.
Naidoo encouraged the banks to provide debt relief with directives early on in the crisis that enabled them to do so without necessarily having to impair the loans, as well as to draw on their capital buffers if needed.
“In theory we want banks to lend as much as they can and keep credit flowing to the economy, because we think that would reduce the impact of the crisis and reduce firm failures and retrenchments,” Naidoo said this week.
“Payment holidays should in theory be good for banks’ balance sheets and lower the probability of default.”
However, he said, an increase in provisions was clearly required. “We expect defaults will rise, but we will be checking — are they rising too fast and where?”
Naidoo, who issued a directive advising that dividends not be paid this year to conserve capital, stressed SA’s banks were well capitalised and able to withstand the crisis.
Analysts expect the banks will report lower interest margins, due to the decline in short-term interest rates since the start of the crisis, as well as lower transaction volumes, which will have cut non-interest revenues. However, they are expected to benefit from trading profits given that markets have been so volatile. They have also been big buyers of high-yielding government bonds, raising concerns this is money that could have been lent to customers.
Latest figures from the Treasury show that SA’s banks own 22.6% of SA’s government bonds, about six percentage points up from the level at the beginning of this year.
Stanlib economist Kevin Lings noted that foreign investors’ ownership of SA’s government bonds has reduced by seven percentage points to just over 30%, the lowest since 2012, reflecting their growing concern about the sharp deterioration in public finances.
Ninety One’s Chris Steward and Rehana Kahn wrote in a recent note that global banks were the cheapest they had been at any time since the financial crisis and for the first time in recent history SA’s banking sector was trading in aggregate at a discount to book value — though they warned of very real downside risks: “… by far the biggest risk facing the banks is credit quality”.