The extent of the impact of the Covid-19 coronavirus pandemic and the national lockdown on the banking sector is reflected in recently released results showing a weak domestic economy with a sharp rise in credit losses.
FirstRand CEO Alan Pullinger on Thursday said the bank’s normalised earnings had decreased 38% to R17.3 billion and the group’s return on equity (ROE) – a measure of the profitability of a business in relation to the equity – declined to 12.9%.
The sharp fall in earnings can also be seen in the other major banks which reported their interim results in July and August.
Absa’s headline earnings tanked 93% and credit impairments for the group rose a massive 297%.
Nedbank’s interim results showed a drop of 69% in headline earnings when compared with the prior year’s six-month period. The bank’s impairment charges increased by 202%.
Standard Bank fared slightly better, with the group’s Africa business proving resilient, with headline earnings growth of 11%. However, total group headline earnings fell 44% and ROE was realised at 8.5%. The group increased provisions held against loans and advances by 26% compared with the same period in the previous year.
Capitec also expects its headline earnings to fall by as much as 82%.
FirstRand paid both interim and final dividends for the year to June 2019. For the year to June 2020, FirstRand paid an interim dividend for the first six months of the financial year, but not a final dividend.
There are two sets of drivers for these broad declines. The first set of reasons are the negative endowment impact as a result of interest rate cuts and margin pressure, subdued non-interest revenue growth owing to lower absolute volumes during the lockdown period, and depressed new business origination. These line items impact top-line revenue growth.
The second reason for the broad decline in bank earnings are credit impairments. These are considered the “most significant driver” of the decline, having a direct impact on the bottom line.
Under IFRS 9 accounting regulations, banks are required to recognise future expected credit losses quicker, which will see credit loss ratios spike across the board.
PwC Africa’s financial services leader Costa Natsas said the major banks’ results for the six months to June 30 were heavily affected by the dire human, social and economic costs caused by Covid-19.
Natsas said major banks’ combined headline earnings fell 65.5%, driven by a steep increase in the combined credit impairment charge of 130%. Natsas added that the combined major banks’ ROE fell to 5.4%.
In his presentation, Pullinger said FirstRand’s performance reflected the extremely difficult operating environment, particularly the last quarter of the year following the Covid-19 lockdown in March.
South Africa’s already extremely weak economy was further worsened by Covid-19 and lockdown. The country has also had limited fiscal space to support the economy.
Even though the SA Reserve Bank provided monetary policy support by implementing 275 basis points of rate cuts since the start of the crisis, the real economy impact of Covid-19 halted economic activity, directly impacting tax revenue as well as household and corporate income.
Pullinger said the operating environment for the second half of FirstRand’s financial year to June 30 was considered to be the worst economic crisis since World War 2.
Covid-19 and associated economic crises resulted in three simultaneous and profound shocks – to global trade; to global confidence, causing financial conditions to tighten significantly and abruptly; and to economic activity following the lockdown policies adopted by most of the world’s major economies. This translated into a once-in-a-generation economic stress event, Pullinger said.
He said the group’s impairment charge more than doubled on the previous year’s as IFRS 9 requires banks to make provisions for bad debts based on forward-looking estimates of expected credit losses arising from the economic consequences of Covid-19.
The impact of the credit performance was further compounded by margin pressure and subdued non-interest revenue growth owing to lower absolute volumes during lockdown and depressed new business origination.
Further provisions were raised for increased arrears and non-performing loans as customer income and affordability deteriorated.
In an interview with City Press, FNB CEO Jacques Celliers said the year was operationally challenging. FNB reported that its pretax profits declined 30%.
Celliers said this was mainly driven by a significant increase in credit impairments. He said FNB still delivered a respectable ROE of 25.8% and a “flat” pre-provision operating performance.
He told City Press that FNB’s non-interest revenue declined 2% owing to the significant decrease in volumes during lockdown.
He said FNB assisted customers by waiving Saswitch fees, rental relief on Speedpoints and other devices, and data charges.
“These factors collectively impacted the bank’s non-interest revenue by approximately R529 million,” he said, adding that FNB’s credit impairment charge increased to R14.5 billion, with the credit loss ratio increasing to 308 basis points (2019: 152 basis points).
“This was driven primarily by the increased impact of IFRS 9 forward-looking information adjustments, following the sharp downward revisions to the group’s macroeconomic assumptions, as well as increased impairments to cater for the embedded credit strain of FNB’s debt relief portfolios.”
These resulted in credit provisions increasing by R8.0 billion, with performing coverage increasing to 2.80% compared with 1.89% in 2019.
Celliers said FNB’s non-performing loans increased 33% year-on-year, primarily driven primarily by higher commercial non-performing loans owing to the residual impact of South Africa’s drought in the agricultural book as well as increased transactional non-performing loans given previous client and book growth, and property-related advances.
He said new business insurance volumes were impacted by the slowdown in credit advances and reduced appetite as a result of the Covid-19 economic impact and lockdown restrictions.
Celliers also said FNB demonstrated operational resilience. The bank was able to support its retail, small and medium-sized enterprise and commercial customers through a range of debt relief propositions and multichannel transactional solutions.
“Our relief covered instalments on approximately 606 000 agreements for retail and commercial clients. While most of our commercial clients had already received relief from us, as at end of August we had approved in excess of R1.2 billion on the government-backed Covid-19 loan scheme.”
Celliers said FNB would continue to alleviate financial pressure on retail and commercial clients by keeping monthly account fees unchanged while expanding value across bank accounts.
He said lockdown level 5 had significant impact on customers’ income, but this picture had changed.
“We are now seeing retail customer average income levels recovering to around 95% of what they were before lockdown.”
FNB reported that deposits were up 17%, loans and advances up 3%, the eWallet transacting base up 39% and wealth and investments accounts up 13%.