The story across SA’s big four banks for the latest end-December reporting season was unusually consistent.
The banks’ earnings were down by a steep 48% in aggregate, PwC calculates. But that was a lot better than the results they showed in June, when the economy was decimated by the hard lockdown and the banks had to set aside sharply increased provisions in anticipation of bad debts to come.
Banks, which were declared an essential service as SA went into lockdown, took the hit to their profits while maintaining healthy balance sheets — and while keeping the lights on, as it were, for SA’s economy.
And Nedbank CEO Mike Brown could have been speaking for any of his big four peers when he said after the release of the bank’s results this week: “It was not a year where we focused on earnings. We said very early in the year that the key focus for us was the health and safety of our staff and helping our customers in their time of need. The focus was on resilience: it was all about the balance sheet, not the income statement.”
But if the story and the song sheet were similar, the details showed divergence.
First were the earnings trends, which reflected their different business mixes, as well as the nuances of how they approached the bad debt provisions or so-called credit impairments, which were the big driver in what has been described as a year of two halves.
Headline earnings were down 56.5% at Nedbank and 51% at Absa for the year to December, an improvement on the declines of 69% and 82% respectively in June.
Standard Bank’s headline earnings declined by 44% overall. But its South African operations on their own were down 68%, with the group’s extensive African operations increasing their earnings such that whereas in 2019, Standard’s rest-of-Africa earnings were half of SA's, in 2020 the situation was almost exactly reversed.
And whereas Standard’s Africa operations came to its rescue, Absa's did not.
FirstRand is not directly comparable to the others because its year-end is in June, but it reported a 21% decline in normalised headline earnings for the six months to December, as the economy began to reopen and recover in the second half of last year.
The single biggest driver of the earnings decline across the sector was credit impairments, which PwC calculates were 2.5 times higher in 2020 than in 2019, driving up the credit loss ratio by a full 100 basis points.
Within that, though, were significant differences between the banks that reflect not how they assessed the quality of their loans but also their view on the macro-economic outlook and what it might mean for their retail, business and corporate clients.
On average across the sector, PwC reports that the provisions the banks have set aside cover 42% of their actual non-performing loans — though that ranges from 38% to 51% at the different banks.
Absa, for example, was more cautious than its competitors, with a higher credit loss ratio. That’s in part because its view on the economic outlook was and still is somewhat bleaker than its competitors’, but also because it still uses rules for provisioning inherited from its time as a subsidiary of Barclays — an approach it is looking to change.
— The biggest driver of the decline across the sector was credit impairments.
The result of its conservatism in the first half of the year was that, unlike competitors such as Standard, it had enough set aside and didn’t have to set aside even more in the second half of the year.
Analysts will be watching closely to see how the bad debt story at each of the banks plays out in coming months and years and whether they got it more right or more wrong. That depends, crucially, on what happens in the economy and how it affects their clients.
Another key theme of the results was the update the banks provided on the debt relief they provided to their retail, business and corporate customers in the depths of the lockdown in the second quarter of last year,
At peak, the banks had extended debt relief to about R600bn of loans, or more than 20% of the banking sector’s total loan book, helping to prevent hundreds of thousands of customers from going under.
The relief has mostly expired and generally more than 90% of the customers who were under debt relief are now back to making payments on their loans. But the banks will be watching those loan books closely. And when it comes to new loans, most have tightened up credit criteria, especially on the riskiest, unsecured personal loans.
The banks’ sharp decline in profits meant returns on equity declined, though some banks look worse than others, with returns on equity at end-December ranging from 15.6% at FirstRand to 7.6% at Nedbank.
Crucially, however, all four banks have maintained strong balance sheets, with capital and liquidity ratios well above regulatory minimum requirements. “Resilience” was one of the big words of this season and the strength and soundness of the banks’ balance sheets demonstrated this.
Of the customers who received debt relief last year have resumed repayments on their loans.
— IN NUMBERS: 90 %+
But probably the biggest divergence was on dividends. Last year the banking regulator asked the banks not to pay out dividends to conserve capital in a difficult and uncertain environment, and they complied. This year the regulator tweaked the guidance a bit to allow dividends. FirstRand and Standard resumed paying dividends to shareholders; Nedbank and Absa did not.
Brown said Nedbank’s board had decided to comply with the spirit of the ban on dividends even if the letter now allowed it, and it wanted to rebuild its capital and provide for growth. Absa said it wanted to conserve capital in an uncertain environment as well as provide for growth.
Where the banks see their growth in a post-Covid world was a final and intriguing theme of the reporting season, one to watch in seasons to come. Africa is still a big drawcard. But digital is the big game in town.
Banks have long been talking about and investing in the transition to digital banking and the use of robotics, artificial intelligence and data analytics. For all of them, the pandemic accelerated the digital transition, with sharp increases in the number of customers using their digital offerings of all sorts. Now they are looking at how to leverage that, and how to grow banking in a changed world, with its new opportunities and risks.
PwC’s analysis of the big banks notes that while costs overall were well under control, the banks’ IT spending increased by 14%, some of which was about investing to support remote working and customer servicing and the jump in the use of digital platforms, but a lot of which also went on security, with cyberattacks increasing and cybersecurity front of mind and spending, as PwC’s analysts put it. That too will be one to watch in reporting seasons to come.
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