Coronavirus-related bad debts have set South African banks’ profits back by around a decade or more and they are unlikely to recover for at least three years, two top executives told Reuters, as the economy struggles with recession.
The country’s four biggest lenders have long battled to grow profits in a perennially weak home economy, but any gains were wiped out within a few months as the pandemic prompted massive charges for rising bad loans.
Half-year profits at Standard Bank, Africa’s largest bank by assets, plunged to their lowest in eight years while FirstRand’s full-year headline earnings per share – the main profit measure in South Africa – fell to a seven-year low.
Nedbank’s half-year earnings plunged to 15-year lows while Absa’s were set even further back.
Alan Pullinger, FirstRand CEO, told Reuters earnings would likely be restored some time between 2023 and end-2024, though any estimates were subject to huge uncertainty.
“I’m not sure it’s going to be much sooner than that, and equally I would be disappointed if it’s much later than that,” he said.
The big four banks booked impairment charges worth around 58 billion rand ($3.5 billion), including actual losses on bad loans and provisions for possible future bad debts, according to Reuters calculations.
“Earnings restoration is probably three to four years out if we use the global financial crisis as a benchmark,” said the CEO of one of the other major lenders, who did not want to be named due to uncertainty around the health and economic outlooks.
Other banks declined to give estimates. None of the lenders, whose share prices have plummeted on worries over their prospects, have publicly provided guidance on when earnings will recover to 2019 levels.
Some investors, however, said the banks remained good long-term bets. While the pandemic will deal them a more serious blow than the 2008-2009 global financial crisis, when they got off relatively lightly, their capital levels are high and lending growth has been relatively conservative.
“The first-half was a write-off … But they went into (the crisis) in a better position,” said Richard Cheesman, senior investment analyst at Protea Capital Management, a banking sector investor.
The most serious long-term drag they face now is the ailing economy, already in recession when the crisis hit, and which recorded its largest contraction ever in the second quarter.
“The prospects for economic growth are really poor and likely to remain that way,” said Anthony Sedgwick, co-founder of another bank investor, Abax Investments.
More immediate risks to earnings remain. It’s uncertain how borrowers will cope when debt relief measures like payment holidays end, and banks could yet face more bad debt charges.
Mahin Dissanayake, head of bank ratings for sub-Saharan Africa at Fitch Ratings, said lenders had provisioned for bad debts conservatively, but it was difficult to predict what would happen in even the next few months given the level of uncertainty around the economic recovery.
“It’s a big unknown,” he said.