Bad debts to smack bank profits

THE recession is over but South Africa’s big four banks – Absa, Standard Bank, FirstRand and Nedbank – would report poor earnings for last year and the first half of this year because of heavy bad debt charges, analysts have said.

This comes at a time when their US counterparts, hardest hit by the global economic downturn, have seen their earnings rise impressively in the past quarter, and are expected to triple them by 2011.Analysts said earnings of South Africa’s banking giants would continue to be severely hit in the first half of this year.The banks are in their closed periods and are not allowed to discuss their results before presentations to analysts and the media.Kokkie Kooyman, the head of Sanlam Investment Management Global (SIMG), told Business Report that earnings of the big four banking giants would be down a combined 37 per cent for the full year.This was in contrast to US financial companies’ earnings, which analysts said had risen 120 per cent in the fourth quarter of last year and would climb four times as fast as the market.’US banks have come to the end of their high bad debt charges in the third quarter ended September,’ Kooyman said. He said for the six months due to be reported on now, earnings would fall 33 per cent compared with the same period last year, as bad debt charges continued to increase.According to SIMG, Standard Bank, Africa’s biggest bank by assets, would report flat income growth with expenses surging eight per cent. The bank’s loan-loss provision (credit cost) would be up 42 per cent, while earnings would be down 40 per cent on the previous corresponding period.Absa, South Africa’s biggest retail bank, would report a one per cent drop in income growth and expenses growth of four per cent. Its loan-loss provision would leap 50 per cent, while earnings would drop 35 per cent.FirstRand, South Africa’s third-biggest bank, would have an income growth of seven per cent with expenses growth surging five per cent. Loan-loss provision would be flat and earnings would rise by six per cent.Nedbank, the fourth-biggest local bank, would report income growth of three per cent and expenses growth of five per cent. Loan-loss provision would be flat, while earnings would increase by six per cent.Absa and FirstRand would be the hardest hit by bad debt because of their huge exposure to vehicle financing and small and medium enterprises.Standard Bank would not be as badly affected because of its exposure to markets outside South Africa, which were growing tremendously.Nedbank’s corporate banking had stood the bank in good stead, as South Africa had not seen an enormous increase in the collapse of mid-sized companies, despite the global economic downturn.Kooyman said that South Africa’s corporate sector had withstood the downturn better than corporate sectors in other countries. In the six months to June last year, Absa said retail impairments had increased 110 per cent to R4,2 billion. Nedbank said impairment provisions in the six months to June had increased by 32,9 per cent to R9,142 million.Standard Bank’s credit impairments were up 58 per cent to R7,1 billion in the first half, while FirstRand said increasing bad debts had placed pressure on earnings.Kooyman said the US’s bad debt charges would continue declining this year, whereas the credit cost of South African banks might not decline yet.’We feel local banks and our industrials – while not expensive relative to cash or bonds – are expensive relative to most US markets,’ Kooyman said.According to I-Net consensus, price:earnings ratios of South African banks in 2011 are between seven and eight, signalling a very bearish outlook for banks’ earnings.Tracy Brodziak, the head of financials at Old Mutual Investment Group South Africa, said bad debt charges had been abnormally high in South Africa last year, adding they would certainly hit the banks’ earnings this year.’We will start to see a recovery in the second half of this year, with significant earnings growth expected in 2011,’ she said. – Business Report