Picture: REUTERS
Picture: REUTERS

Nedbank has seen a steep increase in impairments since the lockdown began and had restructured loans amounting to 10% of its loan book, the country’s fourth-largest bank by assets said on Friday.

As at the end of April 2020 we had proactively approved and concluded restructures for eligible clients amounting to approximately R81bn,” Nedbank said in a voluntary update on Friday.

At the end of December 2019, Nedbank had total loans and advances of R796.8bn.

In a sign of how severely the pandemic is affecting the economy, it implies the group has restructured about 10% of all loans and advances in the five weeks between the start of the lockdown on March 27 and the end of April.

The assistance has been extended to 225,000 clients, it said.

Though the group reported a “steep” increase in impairments during April, this is largely due to how banks must pre-empt bad debts by writing off a portion both at the inception of loans and when there are significant changes in economic conditions that would warrant such.

Nedbank said bad debts write-offs up until the March were well contained and remained within the upper limit of 100 basis points. But the bank now expects GDP to decline by 7% in 2020.

Similar to competitors Absa, FirstRand and Standard Bank, Nedbank has endured a precipitous decline in its share price — 52% — over the past three months.

The market is attempting to gauge how bad the fallout from Covid-19 crisis will be in terms of bad debt expenses, says Avior Capital Markets bank analyst, Harry Botha.

“It’s really difficult to anticipate what is going to happen as there is no recent precedent. Unlike the GFC, banks have been very conservative in respect of lending moving into the crisis. So from that point of view, you are probably not going to see as bad a problem with bad debts on the consumer side of things. But in other places, like corporate loans, we could see distress,” says Botha.  

His guess is that the market is now pricing in credit loss ratios of 5%-8% over the next few years. Credit loss ratios represent the costs associated with writing off bad loans as a percentage of the average loan book of a financial institution.

This implies credit loss ratios could be two to two-and-a-half times those seen during the peak of the global financial crisis, and partly explains why the share prices of banks have declined so sharply.

Where Nedbank might have a problem is in its retail mortgage book, says Botha.

“The new business they were writing in the last two years saw mortgages being granted with high loan-to-values. So, while the loan book was growing quite slowly (about 5% per annum), a small decline in house prices could leave them exposed.”

The Reserve Bank cut interest rates by a further 50 basis points (0.5%) on Thursday, bringing the total reduction in interest rates in 2020 to 275 basis points.

While this has brought significant relief to millions of consumers, it puts more pressure on banks’ margins, affecting profitability at a time when they are beginning to incur losses in relation to bad debts.

Nedbank said its net interest margin decreased from the 2019 level of 3,52% “primarily as a result of the endowment impact from lower interest rates”.

The group has enhanced its governance as it begins to navigate the fallout of the pandemic, with the board meeting telephonically every two weeks to be kept abreast of developments.