Business Maverick


SA banks have already cut their losses and their earnings forecast looks sunny

SA banks have already cut their losses and their earnings forecast looks sunny

If interest rates begin to fall by March next year, the credit loss outlook for banks will improve. However, in the interim, the mobile virtual network operator (MVNO) space is giving banks an opportunity to diversify income streams while providing an attractive value add and moving customers over to digital.

Charles Russell, the head of financial research at SBG Securities, says analysts at his firm expect interest rates to start going down as early as March next year.

“The way risk is building at the moment is not helpful for consumers, SMEs or large corporates; and it’s constraining growth,” he says, adding that if monetary policy starts easing in March, it would be good for the banking sector. 

“If that easing only starts towards the end of next year, there’s going to be a non-performing loans cycle that’s going to get a little larger than what was originally anticipated.

“The way that credit losses are playing out at the moment is that the banks reckon they have hit peak credit losses already, Bear in mind that they they operate under an accounting regime (IFRS 9) that requires them to use a 12-month forward-looking view of credit losses. So they’re already anticipating credit losses in September 2024,” he says. 

The figures released by the big four banks tally with his assessment. Speaking last week at the release of FirstRand’s annual results to the end of June 2023, chief executive Alan Pullinger noted that the bank’s overall credit performance for the year was in line with expectations, with a credit loss ratio of 78 basis points. 

Nedbank saw a 57% increase in impairment charges, particularly in the retail consumer banking segment, for the six months to June. Absa’s South African interim headline earnings plunged by 17% on the back of 60% higher credit impairments, and Standard Bank registered a 42% jump in credit impairment charges year-on-year.

“The long and the short of it is that we’ve probably seen credit losses peak in June in the last set of banking results, and those are going to begin to moderate into the second half of next year. If interest rate cuts start to come through in March next year, then you can expect to see credit losses moderating at a faster rate, which makes the outlook for banks look pretty solid. Banks are enjoying peak margins at the moment, and net interest margins are wide as a result of the interest rate hikes,” Russell says.

Miyelani Maluleke, a senior economist at Absa Corporate and Investment Bank, says while he believes that the rate hiking cycle has topped out, he also agrees that the South African Reserve Bank will not be in a hurry to cut interest rates.

“Inflation expectations, as measured by the BER’s quarterly survey, have drifted higher. We believe the MPC [Monetary Policy Committee] will want to see a clear turn in inflation expectations towards the mid-point of the target range, with rate cuts kicking in from around March next year,” he says.

However, not all experts think rate cuts will happen as soon as March 2023. Pullinger, for example, says he expects to see rate cuts only in the latter half of 2024 and those are likely to be “small rate cuts of 25 basis points, which are unlikely to bring immediate relief to consumers”.

Russell observes that all the big banks have strong balance sheets, good levels of capital and high levels of provision.

“Earnings growth should be in the high single digits, possibly into early double digits for the next couple of years,” he says. DM


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