SA banks ‘will withstand Covid-19 shocks’
Financial stress testing involves the assessment of modelled outcomes under a range of adverse economic scenarios (called “stress scenarios”) - typically, mild, medium and severe.
The high-level stress testing was done as part of postgraduate research by Corné Conradie, actuary and PwC partner in PwC’s actuarial, risk and quantitative team. It was done in collaboration with Professor Conrad Beyers, Absa chairperson in Actuarial Science at the University of Pretoria.
The largest full-service banks, which include Absa, FirstRand, Standard Bank, Nedbank and Investec, were assessed. These banks account for 91% of bank deposits and 94% of loans granted by South African banks.
Beyers said although it may be unrealistic to make reliable forecasts about the spread of the virus based on epidemiological models, it is, however, possible to use financial modelling to form a view on the impact on the banking sector, which forms the backbone of the financial system.
“It is clear that banks will experience significant strain, but the financial system appears to be stable for the foreseeable future,” Beyers said.
The research shows that banks are expected to experience significant credit losses. These will be driven by defaults on residential home loans, company loans and retail unsecured loans. It is also expected that bank deposits will drop, as a result of lower interest rates, lower economic growth, lower stock market returns and lower household disposable income.
Despite these stresses, banks are sufficiently capitalised to withstand the shocks, Conradie’s study found.