Cause for Concern ….
The banking sector is likely to be forever altered as a result of the Covid-19 pandemic. I do see the South African banks surviving the crisis, but expect some individual stress and strain.
See my take and that of Mike Brown (CEO Nedbank) below, in conversation with Shaun Harris.
By Shaun Harris
27 April 2020
Banks exemplify solidity. Love them or hate them, people need them for loans, savings and investments. But what now, and what of the future when the coronavirus has eventually passed? What will the banking sector look like then?
Even without the benefit of a crystal ball informed views offer various scenarios of what banks will look like post Covid-19.
“These are unprecedented times for countries, businesses and banks globally – no one can make accurate predictions in this environment, but what we do know is the Covid-19 pandemic and its impact will eventually pass,” says Mike Brown, CEO of Nedbank.
Bank’s financial results and outlooks, however guarded, do give some indication of what banks are going through now in the lockdown and what banks might look like on the other side.
Banks were under pressure some time before the outbreak of the virus, from the ailing South African economy, the rating agencies downgrades, and intense competition between the banks for customers. Then Covid-19 arrived and matters got worse.
It’s reflected in recent results and trading statements from banks. On April 22 Standard Bank released a statement saying “in 1Q20 earnings attributable to ordinary shareholders were 27% lower than in the comparative period.”
A decline of 27% is quite a knock, but the statement goes on to say client credit impairment charges were “significantly higher” in the first three months of the year as businesses struggled with the economic slowdown and nationwide lockdown.”
Nedbank has also taken knocks. Earlier in April more than R5bn was wiped off its market capitalisation in one session on the JSE. Mike Brown puts this in context.
“Our share price on that day reflected the fact that it was the day we traded ex the dividend of R6.95. This is an important aspect many newspapers missed, but investors understand. Our share price has underperformed in 2019, one reason possibly being we are more SA focused than peers and in 2019 the SA economy underperformed versus expectations.”
Simon Stockley, among his various roles a banking analyst, is not too concerned about recent bank results. “I don’t see large scale collapse or consolidation in the sector. Our big five banks are all adequately capitalized, well run and generally have displayed conservative lending criteria, as characterised by the 2008 financial crises which saw, after some initial volatility, all of the major banks surviving the crises and emerging stranger.”
Less upbeat is Ingham Analytics, who view Covid-19 as the “coup de gráce for banks”. They have warned their readers repeatedly about exposure to banking stocks, and say the recent cut in interest rates reinforce their bearish stance.
One bank in serious trouble is the government-owned Land and Agricultural Development Bank, commonly known as the Land Bank. On April 22 it warned creditors that it might default on some R738m of indebtedness scheduled to mature by the end of April due to “a cash crisis it was experiencing.” It also warned of potential defaults on payments on its R50bn bond program.
Yet the Land Bank is a different animal in the banking sector. But still an important animal, providing capital to the farming community. That’s important now. As South Africa starts to ease out of the lockdown farming will become increasingly important. Pre-lockdown stock piling saw many consumers stocking up on frozen and tinned foods. With the retail market returning to normal there will surely be increased demand for fresh produce.
While Stockley does not expect any banks to fail, he does warn that certain specialist lenders will be more adversely affected than the main banks. “Capitec and SA Homeloans are two such cases in point. Capitec because the majority of its lending is in the unsecured sector, where its customers are likely to be under the most financial strain. SAHL because of its unique funding model and reliance on the capital markets for ongoing liquidity.”
Stockley knows SAHL well. He founded the organization and was its first CEO. But while he expects both above examples to suffer stress to their funding models in the short term, “I expect them to both survive.”
But what of the post Covid-19 future for banks? Are plans being put into place now? Nedbank’s Mike Brown responds with an emphatic “Yes”.
“We have a shorter-term focus on resilience and how we operate in lockdown as an essential service. A medium-term focus on how we will transition out of the lockdown, and then a longer-term focus on reimagining how we operate and what we have learnt in this time and as a result what banking may look like in the future.”
Stockley says his prediction is for a more collaborative approach to banking and customer relations. “I see banks adopting a more partnership model to their interactions with customers. Risks and rewards are going to have to be shared more equitably than they have been in the past. In the post Covid-19 reality, they are going to have to nurse their customers back to full health. Those institutions that understand this shift in the balance of power are likely to thrive.”
Back in 1971 the band Traffic produced their greatest album, The Low Spark of High Heeled Boys. In the title track, Steve Winwood sings:
The percentage you’re paying is too high priced
While you’re living beyond all your means
And the man in the suit has just bought a new car
From the profit he made on your dreams
But Winwood goes on:
But today you just read that the man was shot dead
By a gun that didn’t make any noise
And it wasn’t the bullet that laid him to rest
Was the low spark of high-heeled boys
For banks, there is both a warning and encouragement in these words. They have to help clients, sensibly of course, but hard-pressed customers are on the brink of revolt and need help.
Traffic never explained what the “low spark” was in their song. Applied to South Africa, it’s like President Cyril Ramaphosa understood the low spark. He knows starving people who cannot buy bread are on the point of revolution, and is trying, hard, to ease that.
We will all hope he has extinguished the low spark in time.