Nedbank opens what looks likely to be a bumper reporting season for banks

Nedbank kicks off the big four banks’ reporting season on Wednesday and it’s already signalled that its earnings will be even better than the banking group or the market expect — a trend that could be followed as its rivals report in coming weeks.

It’s the “base effects” that are the big driver, with the six months to June this year set against six months that last year included hard lockdown, when the banks’ transaction volumes crashed and they had to provide massively for debts they expected to go bad.

Now, they are unwinding those provisions, boosting earnings. And if their clients are recovering sooner and better than they had expected, they can do so too — driving higher-than-expected earnings growth.

Nedbank’s share price rose more than 9% on Thursday, after a trading update disclosed it expects headline earnings per share to increase by 145%-150% for the six months to end-June.

Six weeks ago it released a trading statement with a mere “more than 100%” prediction. Avior Capital Markets analyst Warrick Bam said Nedbank was looking probably twice as good as the market had expected.

And with the market anticipating other big banks might come in with better-thanexpected earnings numbers too, Absa and FirstRand share prices followed Nedbank up on Thursday, gaining 8.3% and 4.6% respectively.

JP Morgan Cazenove analyst John Storey estimated in a report last month that the big four would collectively deliver year-on-year earnings growth of about 150%, with an expected 42% drop in credit impairment charges the single largest driver. The question, said Storey, was whether the banks could grow their top line revenues, as well as control their costs, to ensure growth in preprovision operating profits.

He expected that the big four banks’ revenue will be down by just 1% year on year at end-June. That’s despite the drop in global markets’ trading revenue this year compared to the huge volatility and huge volumes that lifted revenues going into the Covid crisis.

It’s also despite the 300 basis points of interest rate cuts since the beginning of last year — which will have reduced the interest banks earn on their own capital, even though it will have helped their clients.

Storey forecast a sustained recovery in banks’ earnings and returns on equity over the next three years. Consumers are in better shape than they were at the time of the last shock, in 2008, and with the economy recovering banks should be able to grow their retail books in core areas such as mortgages and vehicle asset finance.

Oystercatcher joint CIO Jonathan du Toit said banks’ earnings are not yet going to be back at 2019 levels but as the economy recovers “things only get better from here”.

Du Toit said that, with the rand now much stronger than it was in the six months to June last year, the banks with offshore exposure will not optically look as good (because their foreign currency earnings will be translated at a stronger rand rate). That applies particularly to Standard Bank and Absa, with their extensive Africa networks, but also to FirstRand. By contrast, Nedbank is almost a “pure play” South African bank, Du Toit said.

Bam said, however, that there is a slight disconnect between the banks’ core customers and the GDP numbers, with the banks’ core customers recovering faster than SA’s GDP would suggest. This could partly reflect their global exposure, given that global GDP is recovering faster than SA’s. The big banks also have relatively little exposure to the small and medium enterprises that have been hardest hit by the Covid crisis.

The banks varied in how aggressively they provisioned for expected bad debts during the hard lockdown in the first half of last year, with Absa being the most conservative and Standard initially the least. Analysts expect they will differ in the timing of their release of provisions, depending on their assessment of the recovery and of their lending books, and this will shape their earnings growth for the current reporting season.

Overall, however, the banks will do significantly better than the life assurers.

Business Day this week reported Liberty saying it was budgeting for at least R1.2bn in Covid-related life insurance claims over the next six to nine months and has had to top up the pandemic reserves it set aside last year.

Analysts expect rivals such as Old Mutual and Sanlam will also have to top up their reserves to deal with Covid’s impact.