Risks remain elevated for banks as 2021 may bring more business insolvencies - report

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In 2020, SA banks fared much better than initially feared. But as the pandemic is now in its second year, the Boston Consulting Group says their strong position could be eroded.
In 2020, SA banks fared much better than initially feared. But as the pandemic is now in its second year, the Boston Consulting Group says their strong position could be eroded.
  • The Boston Consulting Group says banks face a higher risk of loan losses this year.
  • In 2020, SA banks fared much better than initially feared ended the year with the same level of liquidity buffers they had before the crisis.
  • But as the pandemic is now in its second year, it could erode their strong position. 

South African Reserve Bank (SARB) Governor Lesetja Kganyago recently assured South Africans that local banks are as healthy as they can get. Their huge liquidity buffers have allowed many to start initiating the conversation about resuming dividend payments. But, a new report suggests it might be too early for the sector to let its guard down.

A US consulting firm, the Boston Consulting Group (BCG), said on Tuesday that banks in South Africa should brace themselves for loan losses in the coming months as most economies are likely to see greater company defaults and business insolvencies this year.

Its report, titled Global Risk 2021: Building a Stronger, Healthier Bank, said while banks proved their tenacity in 2020 by providing relief to customers without denting their financial standing much, it was now time to tend to their own health.

"There is little question, for instance, that the next 18 months will feature more defaults and insolvencies as job losses, supply-demand disruptions, and other pandemic-related impacts take their toll," read the report.

Persistent low interest rates, which are also likely to remain unchanged, will add another train to banks' incomes.

Tijsbert Creemers, MD and partner at the BCG's Johannesburg office, noted that South African banks showed more resilience than some of their global peers. They were still profitable and in a solid position because of the huge buffers that they've been growing diligently since the 2008/09 global financial crisis.

But Creemers said this cushion, and the strong position of South African banks, could be eroded as the pandemic enters its second year.

"If the global economic outlook worsens, the impact is likely to be felt differently from country to country. BCG findings suggest that banks in countries where tourism, real estate or transport make up a larger share of the industrial mix will be most affected," wrote Creemers.

However, he said - according to the BCG report - there are opportunities for banks to better manage risk and strengthen their balance sheets. The report noted that investing more in digital capabilities such as artificial intelligence, data analytics and quantitative risk analysis can help banks better predict and mitigate loan losses.

"The important next steps for banks are to understand for which clients they are willing to extend exposure and for which clients they should be more cautious. Quantitative analytics is a must-win battle for banks to do this better than their competition," said Creemers.

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