Picture: ISTOCK
Picture: ISTOCK

South African banks face another wasted year for earnings growth as the euphoria that greeted Cyril Ramaphosa’s ascendancy to the presidency fades with the reality of the challenges facing the economy.

The country’s largest lenders start reporting first-half results from next week against the backdrop of tax hikes, record petrol prices, stubbornly high unemployment and an economy that is showing little sign of recovering after shrinking in the first quarter. While banks have been able to contain expenses and benefit from an improvement in loan collections to stay profitable, those are starting to wane in the face of muted credit growth.

"We have seen this for a few years now and most of the banks have been good on costs, but cost growth below inflation rates is not sustainable," said Jan Meintjes, a portfolio manager at Denker Capital in Cape Town. "Another year of poor top line growth could see the banks’ earnings decline in 2019 as cost pressures mount."

Since taking over in February, Ramaphosa’s administration has struggled to escape the after-effects of his predecessor’s scandal-ridden tenure, and growth hasn’t exceeded 2% since 2013. And with uncertainty still lingering over policies around land reform and mining ownership, companies are holding off on making big investments and deals, suppressing demand for loans.

Banks need to grow loans, particularly in the retail segment of the market, said Patrice Rassou, head of equities at Sanlam Investment Management. Should there be a consumer recovery, lenders skewed towards retail banking like Standard Bank, Absa and FirstRand’s First National Bank (FNB) stand to benefit, he said.

While South African bank analysts do not do estimates for first-half earnings, FirstRand, the second-biggest bank, releases full-year results in September, which are expected to show a 6% increase in adjusted earnings per share, according to data compiled by Bloomberg.

The four dominant lenders are also facing increased competition from entrants such as Discovery, the country’s biggest health-insurance administrator, which plans to start offering banking services, using mostly digital channels. Capitec Bank, the country’s fastest-growing lender, was able to expand its share of the retail-banking market while the big four were too complacent to see the opportunity and too reticent to extend credit, said Asief Mohamed, chief investment officer at Aeon Investment Management.

Absa "faces earnings headwinds from weak loan growth and a rising competitive threat in SA that overshadow lofty growth ambitions to double in size outside the country", Bloomberg Intelligence analysts Philip Richards and Edmond Christou said in July. The lender is seeking to regain market share and expand in the rest of Africa following a rebranding from Barclays Africa Group and revamping its operations after Barclays Plc cut its stake to below 15%.

While Nedbank’s first-half earnings will get a boost from a return to profit at Ecobank Transnational, the African lender in which it holds a 20% stake, the company’s own operations will probably reveal only low single-digit growth, said Denker’s Meintjes.

In the meantime, all they can hope for is a revival in SA’s economy.

"A rising tide should lift all boats," Meintjes said.

Bloomberg

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