Alan Pullinger. Picture: Freddy Mavunda
Alan Pullinger. Picture: Freddy Mavunda

Banking group FirstRand does not expect to hit its target of real growth in earnings this year. We asked CEO Alan Pullinger if it could be worse: a banking crunch because of the collision of the Covid-19 coronavirus, oil price shocks and reeling global markets?

AP: I think the world was probably quite loaded, and I think if you look at overall debt levels there are a lot of regions globally that are struggling. China was already slowing even before this issue. The US is a bit of a standout, but there have been lots of worries for some time. Covid-19 [may] be the first domino that gets people worried, and [then] they start worrying about everything. Honestly, I think the economic consequence of the reaction to the virus is going to be many multiples worse than the actual virus.

What is FirstRand doing about Covid-19 in its own organisation?

AP: We’re doing what you’d expect from a big corporate. So we’ve got a whole lot of education going, hand sanitisers that have been put on all the floors in all the toilets, we’ve cancelled trips, we’ve cancelled conferences. If you suspect something you need to self-quarantine, so we’re taking all of the public advice on this stuff. I would say for FirstRand probably the issue is much less the impact for us in our own business; it’s much more the impact on our customers that worries me. Because when you see planes flying half-empty, and flights being cancelled and people not going out to dinner, and you can’t export because the market you were going to export to is in lockdown — in all of those things, people are losing money.

Exactly. So could it not jam up the banking system?

AP: I don’t think so and certainly not the global system, and the reason is that many economies have got the fiscal space to be able to come with a remedy. Already in the US, President Donald Trump is taking a tax relief bill to congress, so that will pump a lot of money into that system. The problem we’ve got here is that we’re fiscally constrained. There’s nothing that our government can do. So I’m afraid this is why this Covid-19 issue has come at a very bad time for us. We were already grinding lower in terms of growth. There’s no point in going to Pretoria to say: "Can you pump liquidity into the market?" They’re looking to cut expenditure. They’re trying to save SAA, they can’t help.

On FirstRand’s results, your noninterest revenue was up 5%. Are you in a situation where you can lend to counter the economic gloom and kick-start growth, or do you have to be prudent and not lend?

AP: Regardless of what banks would like to do to try to help, there are quite strict guardrails that banks need to stay within. If you can’t afford the lending, you can’t get the lending. And even if we’ve advanced credit to you already and we see you’re getting into a difficult patch, and we say "OK, we’ll give you a repayment holiday", we’ve got something called IFRS 9 credit models that are very sensitive to any increase in perceived risk. So to any of these interventions, the models would react, and they would pick up that the consumer is in stress. And if the models pick that up, your levels of provisions and impairments skyrocket, literally skyrocket. So apart from banks wanting to help — it’s not without limit and consequence.

So you would need economic growth that comes from, rather, policy reforms?

AP: We are going to need business and consumer confidence to come back and right now those are both heading in the other direction. What they want to see is true tackling of structural reform. But if there’s no progress — and I have to say our progress has been painfully slow — then confidence is going to remain low.

So you can’t break that confidence death loop on your own?

AP: We’re an important part of it, but what’s more important for the banking system right now is that [it] remains resilient and strong. What if the banks get into trouble because of this turmoil? Then we truly have a nightmare on our hands. Banks must stick to what is good banking, what is good regulation. Don’t let the banks get themselves into trouble; then it’s orders of magnitude worse.

Do you think we’re facing down a bad debt crunch in SA?

AP: We’re definitely not forecasting that. If we look back on previous cycles where we’ve had a big consumer downturn, when bad debts have spiked in the past, we’ve had high interest rates. When interest rates spike, bad debts accumulate very fast because consumers just can’t tighten belts fast enough. This cycle is very different because our interest rates are quite low, and we think they should still go lower because inflation is very low.

So that’s not the environment where you get a big bad debt shock. What you do get is a slow grind.