Credit conditions across the traditional “Big Four” banks – Absa, First National Bank, Nedbank and Standard Bank – have improved considerably over the past year, with the banks reporting substantially lower losses through bad debt.
This is according to the latest banking report by accounting firm PwC, which analyses the banks’ publicly available financial figures. The report does not include Capitec because, according to Rivaan Roopnarain, PwC’s banking and capital markets director, it has a different reporting period and a significantly different business model. Capitec is primarily a retail bank, and so cannot be easily compared with the broader operations of the Big Four, which include commercial, investment and private banking as well as offshore subsidiaries.
While the banks’ overall performance has improved since the pandemic-induced financial crisis in March last year, it was the unexpected improvement in the credit environment that provided the biggest boost.
Impairment costs to the banks – in other words, bad debt that they write off – fell by 65.4% over the 12 months to the end of June (they dropped over the period from R53.076 billion to R18.023bn). The combined banks’ credit loss ratio (bad debt against all debt) dropped from 2.32% at the end of June last year to 0.82% at the end of June this year.
Total debt (“gross loans and advances”) across the four banks has remained relatively static, at R4.56 trillion (it totalled R4.52tr in December 2020 and R4.63tr in June 2020). Retail portfolios showed muted growth across mortgages, vehicle and asset finance, and credit cards, which grew 0.5%, 0.9% and 1% respectively in the first six months of the year.
The PwC report states: “Declines in credit impairment charges are primarily due to an improvement in economic outlook, better than expected collections experience, less onerous lockdowns and a clearer understanding of industry-specific impacts as a result of the pandemic.”
On the banks’ resilience through the pandemic and the challenges they continue to face, the report says: “When the major banks released results at this time last year, it was in the context of unprecedented challenges triggered by the Covid-19 pandemic. Domestically, those challenges came against the backdrop of a laboured economy – one that entered the pandemic having experienced sustained weakness in growth and persistent structural challenges throughout the last decade.
“Since then, the major banks have been determinedly focused on ensuring their operational and financial resilience and supporting customers, communities and colleagues. While operating conditions were relatively supportive in the first half of 2021, the South African economy remains afflicted by several challenges, amplified by new waves of the pandemic, with unemployment having reached record highs amid expectations of continued uncertainty. Globally, financial markets were supported by fiscal stimulus and low interest rates over the period, while vaccination rollouts broadened beyond advanced economies.
“Against a still challenging backdrop, the major banks delivered resilient results for the period as underlying business momentum and risk profiles performed better than expected. Armed with recent lessons learnt and emerging customer and workforce trends, management teams have focused attention towards reimaging overall bank strategies.”
Apart from the improvement in credit conditions, themes observed in the banks’ results included the following:
• Record commodity prices supported corporate earnings and, in turn, loan performance in wholesale credit portfolios.
• Other economies in the region, which are also highly dependent on commodities, also benefited, which boosted the performance of the banks’ subsidiaries in these countries. Gains were partially offset by volatility in exchange rates caused by a stronger rand and the drop-off in tourism.
• Key balance-sheet metrics continued to show resilience, although profits have not yet reached pre-pandemic levels.
• Costs remained tightly managed below inflation growth for the period, benefiting from a stable inflation environment and lower travel and entertainment costs.
• Robust growth in banking revenues was driven by a combination of heightened client activity, digital transaction volumes and credit demand, albeit off a low base.
Digital banking and ESG
The report reflects a focus by banks on two major themes going forward: further advances in digital banking services, and ESG (environmental, social and governance) issues.
On digital banking, the report states: “While investments in IT architecture, digital platforms, data and automation continued, the banks highlighted ambitions to capture learnings from the Covid-19 crisis and transform how they deliver products and services. Various operating models have begun to emerge, ranging from providing end-to-end services alongside underlying financial transactions to creating ecosystems by connecting customers with partners, fintechs and other providers through open architecture, and outsourcing some aspects of the delivery model to strategic delivery partners.
On the rising relevance of ESG, the report says: “Board, investor, customer and regulator perceptions of value and risk are changing, with ESG issues rising rapidly on the agenda. Thinking is moving beyond reporting of climate-related disclosures and ESG policies. The need for a convincing ESG strategy and appropriate performance measurement indicators is now front of mind.”