How South Africa’s shrinking economy is hurting banks

South Africa’s moribund economy is dealing a hammer blow to the country’s banks, which are facing profit declines of as much as 85%.

The true extent of that pain will be laid bare when the lenders start releasing results next week in what is shaping up to be the worst earnings slump in at least 50 years.

The following charts show just how much the industry struggled in the six months through June:

Africa’s most-industrialized nation was trapped in its longest downward cycle since World War II even before the coronavirus struck. A 30.1% unemployment rate, and little progress in reversing the malaise that threatens to push the economy to its deepest contraction in almost nine decades, is making it harder for consumers and businesses to repay loans and transact.

The South African Reserve Bank in March eased capital rules for lenders to free up their balance sheets so they can better help customers with extra loans or by rescheduling existing credit.

By the end of June, they had provided about 31 billion rand ($1.8 billion) in coronavirus-related relief, according to the Banking Association South Africa. Even if conditions deteriorate further, lenders are well armed to cope, with much more high-quality liquid assets to cover outflows than the regulator requires.

Standard Bank Group Ltd., the continent’s biggest lender by assets, has guided toward a 30% to 50% first-half profit slump when it releases results on Aug. 20. Absa Group Ltd., which is scheduled to report on Aug. 24, expects earnings to decline as much as 85%.

FirstRand Ltd. said earnings excluding accounting adjustment probably fell as much as much as 45% in the 12 months through June. Nedbank Group Ltd. hasn’t yet been more specific since saying on May 22 that its first-half profit will be more than 20% lower, while Capitec Bank Holdings Ltd. expects its earnings to decline at least 70% for the six months through August.

Investors are likely to care less about what’s happened and will be more focused on trying to understand how well banks are positioned to recover, said Jan Meintjes, a portfolio manager at Denker Capital in Cape Town. Any positive outlook for 2021 or 2022 will help to boost share prices, he said.

“What is most important is the quality of those earnings and how conservative the banks were in arriving at those numbers,” Meintjes said. “I would like to see the details — what the balances were on accounts banks provided assistance to, and how collections on those accounts went in the last few months.”

Now read: What’s Next in Finance – In conversation with Pieter Bensch

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How South Africa’s shrinking economy is hurting banks