Big banks report sharp drop in bad loans
Credit conditions at the traditional “big four” banks – Absa, First National Bank, Nedbank and Standard Bank – have improved significantly over the past year, with banks reporting significantly lower losses from bad debts.
This is indicated in the latest banking report from the accounting firm PwC, which analyzes the public financial figures of banks. The report does not include Capitec because, according to Rivaan Roopnarain, director of banking and capital markets at PwC, the reference period and the business model are very different. Capitec is primarily a retail bank, and therefore cannot be easily compared to the larger Big Four operations, which include commercial, investment and private banking as well as offshore subsidiaries.
While the overall performance of banks has improved since the pandemic-induced financial crisis in March of last year, it is the unexpected improvement in the credit environment that has given the biggest boost.
Depreciation costs for banks – in other words, the bad debts they write off – fell 65.4% in the 12 months to the end of June (they fell over the period by 53.076 billion rand to R18.023 billion). The combined ratio of banks’ credit losses (bad loans to all debts) fell from 2.32% at the end of June last year to 0.82% at the end of June of this year.
The total debt (“gross loans and advances”) of the four banks has remained relatively stable at 4.566 billion rand (it totaled 4.52 billion rand in December 2020 and 4.63 billion rand in June 2020). Retail portfolios posted moderate growth for mortgages, vehicle and asset financing, and credit cards, which rose 0.5%, 0.9% and 1% respectively in the first six months of the year.
The PwC report states: “The decline in credit impairment charges is mainly due to an improved economic outlook, a better-than-expected collection experience, less expensive lockdowns and a better understanding of the specific impacts of industry in the aftermath of the pandemic. “
On the resilience of banks through the pandemic and the challenges they continue to face, the report states: “When the big banks released their results around the same time last year, it was against the backdrop of challenges. unprecedented triggered by the Covid-19 pandemic. Nationally, these challenges have occurred against the backdrop of a hard-working economy – an economy that entered the pandemic after experiencing sustained low growth and persistent structural challenges throughout the past decade.
“Since then, major banks have been committed to ensuring their operational and financial resilience and to supporting customers, communities and colleagues. While operating conditions were relatively favorable in the first half of 2021, the South African economy continues to face several challenges, amplified by new waves of the pandemic, with unemployment reaching record levels amid continued uncertainty . Globally, financial markets have been supported by fiscal stimulus and low interest rates over the period, as immunization rollout has spread beyond advanced economies.
“In a still difficult environment, the major banks recorded resilient results over the period, with the underlying business dynamics and risk profiles performing better than expected. Building on recent lessons learned and emerging customer and workforce trends, management teams have focused their attention on overhauling global banking strategies. “
In addition to improving credit conditions, the themes observed in banks’ results are as follows:
• Record commodity prices supported corporate earnings and hence the performance of loans in wholesale credit portfolios.
• Other economies in the region, which are also very dependent on raw materials, have also benefited, which has boosted the performance of bank subsidiaries in these countries. The gains were partially offset by exchange rate volatility caused by a stronger rand and lower tourism.
• Key balance sheet indicators continued to show resilience, although benefits have yet to reach pre-pandemic levels.
• Costs have remained tightly managed below inflation growth for the period, benefiting from a stable inflation environment and lower travel and entertainment expenses.
• Robust growth in banking revenues was driven by a combination of increased customer activity, digital transaction volumes and credit demand, albeit on a weak basis.
Digital banking and ESG
The report reflects the focus of banks on two major themes for the future: further advances in digital banking services and ESG (environmental, social and governance) issues.
Regarding digital banking services, the report states: “As investments in IT architecture, digital platforms, data and automation continued, banks stressed their ambition to learn from the Covid crisis. 19 and transform the way they deliver products and services. Various operating models began to emerge, ranging from providing end-to-end services with the underlying financial transactions to building ecosystems by connecting customers with partners, fintechs and other vendors through an architecture. open, and outsourcing certain aspects of the delivery model to strategic delivery partners. .
Regarding the growing relevance of ESG, the report states: “Perceptions of the board of directors, investors, clients and regulators of value and risk are evolving, with ESG issues quickly becoming the order of the day. The thinking goes beyond reporting on climate-related disclosures and ESG policies. The need for a convincing ESG strategy and appropriate performance measurement indicators is now in mind.