Absa Bank has warned its full-year profits will more than halve — a decline of more than R8bn — as SA’s banking sector reels from the effects of Covid-19.
In an updated trading statement released on Friday, the banking group said it expects headline earnings per share (HEPS) to fall between 55% and 60% in its year to end-December 2020, having forecast a fall of more than 40% in November. HEPS is a widely used profit measure in SA that strips out one-off items.
Normalised HEPS, which account for the effects of the bank’s separation from Barclays, are expected to fall by between 50% and 55%, the statement said. The group reported normalised headline earnings of R16.3bn in its 2019 year.
“Everyone knows that earnings are down because of the bad debts coming through from Covid-19 but I think the banks are overprovisioning,” said Wayne McCurrie, a portfolio manager at FNB Wealth and Investments. “There’s still new credit growth in the market but it’s the bad debts that are hurting bank earnings. There will be some relief once the bad debts are out of the way.”
Absa's full-year 2020 results are scheduled to be published on March 15, the first set of annual financials since the appointment of CEO Daniel Mminele in January 2020. Mminele said at the release of the group's half-year results in August that Covid-19 had been “a crisis like no other with an uncertain recovery”.
Financial services groups including Standard Bank, Sanlam and Momentum have all been hit in recent months as the impact of the pandemic takes its toll on their finances. Standard Bank said in November that it would take years before losses from bad debts, which were worsened by Covid-19, recovered to its targeted range. Momentum Metropolitan Holdings last week almost doubled its Covid-19 provisions, setting aside an additional R850m to help it cope with the impact of the pandemic, which it said was having a more severe effect than initially expected in the fiscal period covering the six months to end-December 2020.
Momentum subsidiary Guardrisk lost a landmark case in December 2020 when the Supreme Court of Appeal dismissed with costs its challenge of a previous ruling that it compensate Cape Town restaurant Cafe Chameleon for business interruption losses stemming from Covid-19 and the ensuing lockdown. The ruling set a legal precedent that potentially put insurers on the hook for billions of rand in business interruption payouts. Other insurers, including Santam and Old Mutual, have also suffered court losses in recent months making them liable for business interruption losses related to Covid-19.
Absa did not go into details of its performance on Friday, but said in November that credit impairments in the nine months to end-September had trebled year-on-year, referring to the ability of customers to repay loans.
There had been an improvement in the third quarter, Absa said, and its credit impairments almost quadrupled to R14.6bn in the group’s six months to end-June 2020. In its half-year results, Absa reported an 82% fall in diluted normalised headline earnings.
More than 2.8-million people lost their jobs in SA between February and April 2020 as the government instituted a host of restrictions to curb the spread of Covid-19, according to the National Income Dynamics Study Coronavirus Rapid Mobile Survey (Nids-Cram). The latest iteration of the survey released last week showed about 2.1-million people gained employment between June and October as lockdown restrictions were eased, but noted that these were not necessarily the same people who lost employment in the first hard lockdown.
“There has clearly been jobs destruction in the economy although we're probably over the worst of it,” said McCurrie. “The rest of the world will probably bounce back a lot quicker than SA, which was already struggling with structural economic weaknesses before the pandemic. SA will probably take three years to get back to 2019 GDP levels.”
Absa’s share closed 1.9% down on Friday at R124.16, extending its decline since the start of 2020 to 16.8%. Over the same period the JSE’s banking index lost 20.42%.
With Karl Gernetzky
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