SA virus fears cloud outlook for banks

The outlook for South African banks is growing murkier amid the rising threat of a second coronavirus wave that could upend an improvement in economic activity.

“With Covid-19 cases in Europe, the US and now South Africa increasing, the big fear for banks is going into some form of lockdown again,” Kokkie Kooyman, a portfolio manager at Denker Capital in Cape Town, said. “What is bad for the economy is risky for the banks.”

The economy is mired in a recession and unemployment is at a 17-year high. That follows restrictions in the second quarter that shuttered everything but essential services.

While most customers are paying their debt, a resurgence of cases in the Western and Eastern Cape is fuelling speculation in local media, like News24, that some regions face lockdowns, which could cause loans to again start souring.

“There remains considerable uncertainty and forecast risk,” Standard Bank finance director Arno Daehnke said. The lender is placing a “caveat” on its comments about its outlook because further lockdown restrictions “will be very detrimental for South Africa.”

Absa chief executive officer Daniel Mminele is seeing “risk everywhere” even though its earnings, like Standard Bank’s, have benefited from faster growing markets on the rest of the continent. Many governments still have fiscal and debt challenges to navigate, he said.

Local banks could benefit from a global recovery triggered by vaccine breakthroughs, stronger commodity prices and a firmer rand, JPMorgan Chase & Co strategist David Aserkoff said.

While an interest-rate cut may hurt income, investors are more worried about the likelihood of dividends, “the cost of risk, non-performing loan issues and the future growth path of the economy”, he said.

The central bank expects SA’s economy to shrink 8% this year, and then to rebound to 3.5% and 2.4% in the following two years. “None of the updates read that rosy,” Kooyman said.

Denker Capital’s base case is that banks may see improvements from March.

Standard Bank on Monday said full-year earnings will fall more than 20%, echoing an earlier forecast by Nedbank.

Absa said its profit could decline more than 40%, while FirstRand expected a drop of 25% in the six months through December.