Finbond liquidity, cash flow position resilient

FINBOND has warned that the Covid19 pandemic and national lockdowns will result in a global economic downturn that will have an adverse impact on sales volumes and revenue – and potentially collection rates and asset valuations.

Finbond, South Africa’s leading mutual and savings bank, said in its financial statements for the year ended February 29, that the decrease in global economic activity and reduced trade brought on by measures to stem the spread of the pandemic would likely lead to higher unemployment, lower gross domestic product (GDP) numbers in the US, Canada and SA.

“This will be partly offset by the significant stimulus, support packages and adjustments to fiscal and monetary policies that governments around the world have implemented in response to the crisis,” said the group.

Finbond expected that the Covid19 pandemic would impact the group’s profitability for the year ending February 28, 2021, as lockdowns would likely prevent customers from spending on non-essential items.

“This will lead to lower sales credit extension and hence revenue. This will be accompanied by higher unemployment as businesses put measures in place to survive, as well as by actual business failures. This will in turn impact customer affordability, resulting in client’s qualifying for smaller loans, or not qualifying at all,” it said.

The company expected lower sales volumes to dent gross loans and to increase surplus cash balances as cash received from customers exceeds capital granted due to declining sales volumes.

“Collections rates, default rates and recovery rates used in the measurement of expected credit loss provisions, which will affect the net impairment charge, may also be impacted. There is no comparable historic credit risk data to rely on in either North America or South Africa. The extent of the estimated stress varies widely and cannot be quantified at present,” said the group.

Finbond said due to the lower credit extension surplus cash balances would increase. However, this might be offset given that lower GDP and higher unemployment rates could impact growth rates and reinvestment rates in both commercial paper and deposits.

“The group may, therefore, experience fluctuations in surplus cash balances, which in turn may impact investment income. Investment income may also be affected by fluctuating interest rates. Interest paid to customers may accordingly be affected by the change in savings behaviour described above and may potentially also be affected by fluctuating interest rate,” said the company.

Despite the Covid-19 pandemic, Finbond said its liquidity and cash flow position remained resilient under the stress scenarios and assumptions presented by its auditors.

Given the uncertain effect that the Covid-19 lockdown would have on the global economy and the group’s profitability for the year ending February 28, 2021, auditors had performed additional liquidity and cash flow stress testing based on multiple levels of stress applied. The stress tests were applied for the duration of the assumed lockdown periods, before performance was projected to return to normal levels over the various estimated recovery periods.

Finbond implemented several initiatives to support its employees and clients during the crisis including cost savings.