Picture: REUTERS
Picture: REUTERS

Lacklustre credit extension and a focus on managing bad debts are the themes expected to dominate the banks’ earnings season, which kicks into gear next week.

All big four banks (Absa, FNB, Nedbank and Standard) will report either interim or full-year results for the period ended June, and while each has its own peculiarities to deal with, none will have countered the effects of the depressed economic cycle and its attendant financial risks.

"I am expecting weak growth in earnings across the board with key themes being low advances growth … considering the low levels of activity and weak GDP numbers we have witnessed," says Richard Hasson, a portfolio manager at Electus Fund Managers.

FirstRand and its golden child FNB will be reporting full-year results and the obvious question will be whether FNB can sustain its sky-high return on equity, which topped 40% last year.

Investors will also be hoping that vehicle and asset finance subsidiary WesBank continues its recovery by reporting a lift in earnings, following its annus horribilis — by FirstRand standards — when those fell nearly 10% in 2018.

The problem for everyone is that demand to borrow just isn’t there.

According to the Reserve Bank, private sector credit extension slowed to just under 7% in June from 7.7% in May, mainly due to a slowdown in demand from corporates, which account for more than half the total market for credit in the private sector.

In a nutshell, that’s down to "lack of employment opportunities, modest property price increases, uncertainty regarding land expropriation without compensation, and tight lending criteria", according to the Bank.

The problem is that the incumbents aren’t just grappling with a weak economy, but an aggressive competitive onslaught.

Click to enlarge.
Click to enlarge.

This will place even more downward pressure on their numbers, says Patrice Rassou, head of equities at Sanlam Investment Management. "There is going to be pressure on margins, fees and revenues due to competition, as no-one wants to increase fees. In fact, there has been a move to lead with a cheap entry-level product to attract or retain customers," he says.

Absa’s interim results will be notable for reasons other than its financial performance, though that will be closely scrutinised too. The bank expects to announce the long-term successor to Maria Ramos, a position that Daniel Mminele, a former Bank deputy governor, is odds-on favourite to assume.

After an encouraging update on its ongoing separation from former parent company Barclays Plc in June (it’s on time and on budget), jittery investors will want to hear that there are no nasty surprises in the tail-end of the project execution.

Rising unemployment should also be watched for its effect on bad debt provisions, something that over the past few years has been very well managed.

"Bad debts are expected to increase off the low base we have witnessed in 2018 and some lumpy provisions may be required for corporate bad debts, which until this year had been very low," says Hasson.

Rassou thinks the recent cut in interest rates by the Bank may be insufficient to contain a potential consumer meltdown. "The banks have been careful in their lending, but consumer balance sheets are coming under pressure and they are struggling to keep up with repayments. Until you have proper relief from lower interest rates — as in cuts of 100 basis points or more — then it’s not really going to help."

Both Standard and Nedbank will be looking to their operations on the continent to deliver the robust growth that SA is so desperately lacking. Standard Bank’s substantial footprint in Africa is already delivering one-third of all profits, whereas Nedbank will be looking for another impressive performance from its 20% stake in Ecobank Transnational Inc.

As for new entrants, the Discovery Group reports full-year results for the same period, and for the first time should include a line item for income from its largest investment to date — Discovery Bank.

The bank — relative to other new entrants like TymeBank and Bank Zero — has had a notable head start in the form of the nearly 300,000 Discovery Card holders it can begin converting to clients. Overall, the group has more than 5.1-million consumers through its medical aid, investment and insurance products.

Standard Bank will kick things off on August 8.