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HomeBank CapitalSouth African banks set for low returns, but may see impairment reversals

South African banks set for low returns, but may see impairment reversals

South Africa’s big four banks could yet receive an earnings boost this year as they reverse some of the 75.4 billion rand — roughly $5.27 billion — in impairments they took in 2020. Yet their return on equity will likely remain lackluster due to the country’s prolonged economic malaise.

Nonperforming loans at the major banks — Standard Bank Group Ltd., FirstRand Ltd., Absa Group Ltd. and Nedbank Group Ltd. — have steadily increased over the past half-decade, during which unemployment hit a record high and electricity blackouts became commonplace.

Standard Bank’s NPL ratio was 6.21% in 2020, up from 4.22% a year earlier and nearly double that of 2016, according to data from S&P Global Market Intelligence. FirstRand’s NPL ratio rose 109 basis points in 2020 to 5.04%, while Nedbank’s surged 189 basis points over the same period.

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“While the South African banking system remains relatively robust, the key shorter-term pressure relates to the trajectory of credit losses that will materialize,” said Meyrick Barker, an investment analyst at Kagiso Asset Management in Cape Town.

Credit impairment development

Over the longer term, the main headwinds for banks include competitive pressures eroding certain profit pools, and poor political decisions continuing to hamper South Africa’s growth prospects, he said.

In 2020, credit impairment charges at Standard Bank and Absa each nearly tripled, to 20.59 billion rand and 20.57 billion rand, respectively, while FirstRand’s increased 59% and Nedbank’s rose 41%.

“The big theme is what’s happening around credit losses from COVID. Banks’ most recent results showed things weren’t as bad as initially feared, so the question is, have banks over-provisioned?” said David Talpert, an analyst at Johannesburg-based Avior Capital Markets.

“Writing back provisions will be the theme that drives bank earnings for the next year or two.”

Yet it is too early to assume there will be a substantial reversal of provisions, warned Ilan Stermer, a bank analyst at Renaissance Capital in London.

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“Banks appear to have provided adequately; delinquencies are stable for now. The biggest concern is that the expected fall-off in impairment charges doesn’t happen, or takes place more slowly than anticipated,” said Stermer. “There might be new loan delinquencies — not necessarily in consumer lending, but in SME and business banking. I’m not convinced NPLs have peaked.”

The major banks are adopting markedly different strategies in terms of new lending.

“FirstRand is the most conservative, pulling back across the board in terms of risk exposure. Absa is the opposite and has been aggressive in trying to gain market share,” said Talpert. “Standard and Nedbank are somewhere in the middle. The big question is whether this is the right time to be lending and whether more conservative banks will find it harder to win back any lost market share.”

Following the global financial crisis, Absa — then owned and run…

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