If Nedbank's latest set of financial results is anything to go by, consumers are recovering faster than expected from the financial hit of the pandemic, and behaving more responsibly than expected when it comes to paying off their debts.
Corporations are doing so too - but borrowing little to spend on the new investments or new expansion projects that could boost economic growth in years to come.
"Earnings in the last six months have been stronger than we thought they would be," Nedbank CEO Mike Brown told investors, after SA's fourth-largest banking group reported a 148% increase in headline earnings to R5.3bn for the six months to June.
A 6% increase in net interest income helped, as did well-contained costs. But the biggest driver of the earnings increase was a 57% decline in credit impairments - the provisions banks set aside for anticipated bad debts - to R3.3bn, from the R7.7bn to which the group lifted them in the same period last year, which spanned SA's hard lockdown.
Nedbank CFO Mike Davis points out that the group increased its credit loss ratio to 187 basis points in the first half of 2020, reducing it to 134 points in the second half and then to 85 basis points in the first half of 2021. At this level the ratio is at the midpoint of the 60-110 basis point range Nedbank targets through the credit cycle, though it typically prefers to keep it towards the bottom end.
Corporations have been paying down their existing loan facilities, especially those in the commodities sector that are cash flush, and one reason the credit loss ratio has fallen is the 7% decline this year in the size of the loan book. The other key reason is simply that most customers are back to servicing their debts.
"Very good collection experience has surprised on the upside," Davis said.
When the Covid crisis hit last year, the Reserve Bank issued two directives - D3 and D7 - that enabled banks to provide their customers temporarily with payment holidays, and if necessary restructure their debt, without having to "impair" those loans and provide against them as if they were debts gone bad. The banks collectively provided hundreds of billions of rands of financial relief to their customers, relief which at one point covered as much as a fifth of banks' total loan books, helping to keep the economy afloat.
But they have since been able to unwind those D3 and D7 loans as customers have returned to servicing their debts.
Davis said Nedbank's payment relief book peaked at R121bn in July last year but was now down to R9bn; restructured loans had fallen from R13bn to R9bn. The better collections reflect a better macro picture, and the turnaround has been remarkable, Davis said. Despite a tough environment, customers have de-geared, cut their borrowing, and started to save at a higher level than before.
"It does suggest the consumer has been responsible," Davis said.
Corporate customers have also been de-gearing - and have not been pushing the button on new projects, which will affect SA's longer-term growth prospects. Nedbank's retail and business bank saw 7% growth in loans, but its corporate and investment bank saw a 19% decline in loans.
It does suggest the
— Mike Davis
consumer has been
responsible
Nedbank CFO
Nedbank is not yet pronouncing the economy out of the woods. It still has a sizeable R4.5bn in provisions set aside to cover it for anticipated bad debts as a result of broad macroeconomic factors. It cut its growth forecast for this year to 4.2%, from 5% just a few months ago, due to the level 4 lockdown and the recent unrest. It sees the growth rate falling to 2% and to 0.7% by 2024. Brown again this week emphasised the urgent need for structural economic reforms.
Its economic forecasts are still relatively optimistic compared to those of PwC, which this week revised its growth forecast for this year down to 2.5%. It estimated that the unrest in July could reduce GDP growth by 0.8% although the fiscal support package would bolster economic growth by up to 0.7 percentage points.
"We are aware that the 2.5% figure for 2021 is at the lower end of forecasts currently available," PwC's economists said in a report this week. They have already incorporated more adverse impact from downside risks, including the longer-than-expected lockdown and recent unrest as well as the risk that load-shedding this year will equal last year's. PwC estimates that power outages added more than two percentage points to the depth of last year minus 7% recession.
Nedbank's monthly data from client transactions on its point-of-sale devices shows an improvement in operating conditions in the second half of last year and into the first half of this year, though the improvement flattened in July and sectors such as airlines, hotels and entertainment continue to be hard hit.
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