Johannesburg - South African banks are expected to skate through the country’s economic slowdown and even make better earnings from projected interest rate increases provided the SA Reserve Bank does not hike the repo rate by more than 100 basis points later this year.
The financial system is under pressure from low economic growth, weak demand for commodities, the continued slide of the rand against major currencies as well as job losses. These are expected to also have an effect on the banking sector.
Analysts agree at least on the benefit to be derived by the banks from an increase in interest rates up to a certain level.
However, beyond 100 basis points, consumers will increasingly struggle with mortgage repayments and likely default on financial commitments.
Index
“At the moment, the big worry for banks is what happens to employment in the economy,” Avior research analyst Harry Botha said.
“If we really see a dip in employment then there will likely be credit write-offs and credit losses for the banks, which are going to be the biggest negative items in their income statements. However, on the interest side, the banks should benefit from rising interest rates.”
On a year-to-date basis, the banks index is up 2 percent since the start of the year, outperforming the all share index, which has risen 0.7 percent.
According to Bloomberg analysis, over the past five years, banks have done better than the all share index, which has experienced a total return of 97 percent while the total result of the banks index’s has been 120 percent.
But Bloomberg’s forecast of the banks’ performance was that the impact of higher interest rate hikes later on in the year would negatively affect the institutions as consumers felt the impact of higher interest rates.
At this stage, the Bloomberg forecasts are for the top five banks to increase their earnings per share (EPS) during their latest financial year.
For the year to February 2016, Capitec’s EPS is forecast to rise 20.1 percent. FirstRand’s EPS is expected to climb by 11 percent for the 12 months to June. For the year to December, Nedbank’s EPS is on track to advance by 7.1 percent, Standard Bank’s EPS is forecast to rise by 26.2 percent and Barclays Africa’s EPS is expected to climb by 10 percent.
“Bank earnings are usually quite closely correlated to levels of gross domestic product in the economy, and what you may see as interest rates rise is that banks benefit as they earn more interest from their customers,” Botha said.
“But at the same time, that results in higher write-offs, higher delinquencies on loans; that means people struggle to keep up with payments (and) eventually they get repossessed or write off the loan.”
Botha said the banks would also fare better with unsecured lending as they had tightened up their lending procedure and their collections and provisioning had improved. He said only extraordinary circumstances, like major job losses, could affect the banking stocks.
However, PSG wealth equity analyst Adrian Cloete said as much as banks were in a tight spot because of disappointing company results, local banks were diversified, which would help their earnings stability.
Strong growth
“Retail advances may grow quite slowly but corporate growth is quite strong. Companies are going into Africa; they are expanding their capacity,” he said.
He said bad debts were under control as long as interest rates did not rise dramatically and given the 25 basis points at the last increase, it was unlikely that it would go up by more than 100 basis points, the safety cut-off point.
Cloete said guidance given by banks for the rest of the year and next was strong but conservative, citing Barclays Africa whose management had set a guidance of 10.5 percent growth in earnings. He said Nedbank had a guidance of between 7 and 8 percent in earnings growth. Analysts had forecast 10 percent, and it was a certainty that “the actual result would exceed management’s guidance”.
For the 2016 year, FirstRand had a guidance of 11 percent earnings growth but the market came in at 13.6 percent.
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