2020 banking profits plunge by R50bn

When the major South African banks announced their results over the last two weeks, the management teams of each noted the exceptional challenges of an unprecedented economic environment during 2020.

According to an overview of banks’ results by PricewaterhouseCoopers (PwC), aggregate headline earnings for all the banks declined more than 48% last year compared to the previous financial year, return on equity more than halved from 17.8% to 8.3%, and provisions for bad debt increased by 2.5 times.

Looking at the actual figures, the headline earnings of the large retail banks that published their results recently declined by more than R50 billion from nearly R85 billion in 2019 to R43.6 billion last year, with PwC noting the combined profit of the banks is now lower than in 2013.

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The results showed the major reason for the decline was the increase in provisions for bad debt.

In reality, policies and accounting rules pertaining to the provision for bad debt means these provisions are likely to turn out to be real losses, rather than just book entries.

The figures indicate thousands of households are facing severe financial difficulties.

The PwC analysis included the annual results of FNB, Nedbank and Standard Bank for the year to end December, while Absa’s interim results for the six months to December were combined with that of the second half of the previous financial year to compare the annual figures.

Investec and Capitec were excluded due to a different product mix and reporting periods.

Costa Natsas, financial services leader of PwC Africa, noted during a presentation of the analysis that the SA economy had started 2020 with the lowest economic growth since the 2009 financial crisis, and then it became worse.

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“Because financial services, and banking in particular, function at the epicentre of the broader economic context, banks’ financial performance is closely tied to the economies in which they operate,” says Natsas.

“The severe disruptions and risks brought about by the Covid-19 pandemic are clearly evident in the major banks’ results for the year ended 31 December.

“The tragedy of numbers is that they cannot fully capture the dire human, social and economic costs caused by the pandemic.

“When the history books complete the accounting for 2020, [they] will recount a profound period – one that altered the trajectory of lives and livelihoods, societies and economies, businesses and households – on a global scale,” says Natsas.

PwC mentions a few stark truths: “The economy has laboured under structural constraints, deteriorating growth trends, worrying unemployment levels and limited fiscal space that [had] been well documented long before Covid-19.

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“Quantifying the domestic economic performance of 2020, as Statistics SA notes, makes for sobering reading.

“While the 7% contraction in the SA economy in 2020 represents a cardiac arrest driven by crisis conditions, it does not diminish the declining domestic economic trends that have prevailed for more than a decade.”

Inflation-adjusted gross domestic product (GDP) per capita peaked in 2014 and has been declining since, which highlights the extent to which economic growth has battled to keep pace with population growth.

They say SA was in some form of lockdown for 279 days last year, with the consequence that GDP per capita decreased to 2005 levels.

This article first appeared on Moneyweb and was republished with permission.

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