The South African banking sector has little reason to be cheerful this holiday season. Cash-strapped consumers drastically reduced discretionary spending during lockdown when they were banned from buying anything that wasn’t on a list of goods deemed essential by the government. Millions of people lost income as companies were forced to slash salaries. The hospitality, retail, entertainment and tourism industries were brought to their knees. Consumers with unblemished credit records had to apply for payment holidays, taking advantage of ‘Covid-19 relief’ arrangements offered by lenders. Banks have seen falling revenue and rising costs. All four of the largest banks in the country have warned that profit will plunge. To add insult to injury, some provinces are seeing a spike in Covid-19 infections, prompting speculation that the country could return to a stricter lockdown. If the economy is slowed by another lockdown, banks are headed for even more trouble. – Melani NathanÂ
South Africa virus fears cloud outlook for banks tied to economy
By Roxanne Henderson
(Bloomberg) — The outlook for South African banks is growing murkier amid the rising threat of a second coronavirus wave that could upend an improvement in economic activity.
“With Covid- 19 cases in Europe, the US and now South Africa increasing, the big fear for banks is going into some form of lockdown again,” Kokkie Kooyman, a portfolio manager at Denker Capital in Cape Town, said by phone. “What is bad for the economy is risky for the banks.”
Africa’s most-industrialised economy is mired in a recession and unemployment is at a 17-year high. That follows restrictions in the second quarter that shuttered everything but essential services.
While most customers are paying their debt, a resurgence of cases in the Western and Eastern Cape provinces is fueling speculation in local media, like News24, that some regions face lockdowns, which could cause loans to again start souring.
For Standard Bank, the continent’s largest bank, the rollout of vaccines could take time and the risk of “pandemic fatigue” may cause safety lapses during the holidays.
“There remains considerable uncertainty and forecast risk,” Standard Bank Finance Director Arno Daehnke said on a call. The Johannesburg-based lender is placing a “caveat” on its comments about its outlook because further lockdown restrictions “will be very detrimental for South Africa.”
Absa Group Chief Executive Officer Daniel Mminele is seeing “risk everywhere” even though its earnings, like Standard Bank’s, have benefited from faster growing markets on the rest of the continent. Many governments still have fiscal and debt challenges to navigate, he said.
Read also: Standard Bank profits plunge, as much as 50%, as banks prepare for earnings slump
“It is too early to call whether we have got this behind us,” the CEO of South Africa’s third-largest bank said on a conference call.
To be sure, local banks could benefit from a global recovery triggered by vaccine breakthroughs, stronger commodity prices and a firmer rand, JPMorgan Chase & Co. strategist David Aserkoff said in an interview.
While an interest-rate cut may hurt income, investors are more worried about the likelihood of dividends, “the cost of risk, non-performing loan issues and the future growth path of the economy,” he said. The central bank expects South Africa’s economy to shrink 8% this year, and then to rebound to 3.5% and 2.4% in the following two years.
Read also :Nedbank: Further warnings as SA banks face plummeting profits
Standard Bank on Monday said full-year earnings will fall more than 20%, echoing an earlier forecast by Nedbank. Absa said its profit could decline more than 40%, while FirstRand expects a drop of as much as 25% in the six months through December.
“None of the updates read that rosy,” Kooyman said. Denker Capital’s base case is that banks may experience improvements from March. “So you still have these four months in between of risk.”
