Combined headline earnings of R43.6 billion declined 48.4% against FY19, combined ROE of 8.3% (17.8% at FY19), net interest margin of 387 bps (426 bps at FY19), credit loss ratio of 180 bps (80 bps at FY19), cost-to-income ratio of 56.4% (55.6% at FY19)
Operating under severely constrained macroeconomic conditions and considerable uncertainty, the major banks delivered a financial performance in FY20 that reflects the challenges of an unprecedented year. Anchored in anxious public health concerns related to the COVID-19 pandemic, depressed business and consumer confidence levels combined to produce the largest annual fall in domestic economic activity in nearly seven decades.
Many of the central themes we highlighted in our 30 June 2020 Major Banks Analysis prevailed throughout the year, as unpacked below:
Credit impairment charges soared relative to FY19, as forward-looking impairment models and post-model adjustments sought to capture the scale of the crisis on loan portfolios. The dramatic increase in impairments contributed as the primary factor to the steep fall in combined headline earnings
and returns, which now compare to 2012 levels.
PwC’s Major Banks Analysis highlights key themes from the combined local currency results of Absa, FirstRand, Nedbank and Standard Bank.
External environment: When the history books complete the accounting for 2020, it will recount a profound period – one that altered the trajectory of lives and livelihoods, societies and economies, businesses and households – on a global scale. Financial services, and banking in particular, function at the epicentre of the broader economic context and therefore banks’ financial performance is closely tied to the economies in which they operate.
The South African economy has laboured under structural constraints, deteriorating growth trends, worrying unemployment levels and limited fiscal space that have been well documented long before COVID-19. Quantifying the domestic economic performance of 2020, as Stats SA notes, makes for sobering reading. While the 7% contraction in the South African 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.
Concerningly, inflation-adjusted South African GDP per capita peaked in 2014 and has since been declining, highlighting the extent to which struggling economic growth has battled to keep pace with population growth. South Africa was in some form of lockdown for 279 days in 2020, triggering GDP per capita to decrease to a level last seen in 2005.
In 2020, the South African economy registered average inflation of 3.3% – its lowest in 16 years. This context provided space for monetary easing and allowed the SARB to cut market interest rates to levels not seen in 50 years. Low inflation and aggressive rate cuts reflect the extent of weakness in the domestic economy, which 2020 starkly illuminated.
Some green shoots were observed in the 4th quarter, with the BER/RMB Business Confidence Index increasing notably from a reading of 24 in Q3-20 to 40. Even at this level, a majority of South African businesses were unsatisfied with prevailing business conditions while household and consumer confidence remained depressed.
Globally, no economy or demographic group was spared in 2020, prompting extraordinary monetary policy and legislative relief in some of the largest economies and creating a backdrop of volatile global markets.
Results highlights: Against this context, Costa Natsas, PwC Africa's Financial Services Leader, noted:
“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 2020. The tragedy of numbers is that they cannot fully capture the dire human, social and economic costs caused by the pandemic. However, these results show that deteriorated economic outlooks and customer impacts played out in sharp declines in earnings due to adverse credit conditions.”
Highlights from the major banks’ results include:
Francois Prinsloo, Banking and Capital Markets Leader for PwC Africa says: “While the major banks’ FY20 results are reflective of an intensely challenging operating environment, they also reveal their resilience. Contemplating how the pandemic and the associated uncertainty and risks may play out, it is clear that purposeful, technology-enabled and customer-centric strategies will feature prominently in the major banks’ areas of focus going forward.”
Outlook: Our economics team expects the global economy to expand by 4.7% in 2021, a forecast heavily conditional on a successful deployment of effective COVID-19 vaccines and accommodative fiscal, financial and monetary conditions. By the end of 2021, or early 2022, we expect the global economy to trend to its pre-pandemic level of output.
At the domestic level, this picture looks starkly different as an uneven recovery pattern among South Africa’s key trading partners and geographic neighbours is likely. At one end of the spectrum is China, already larger than its pre-pandemic size, while on the other are advanced economies that are either service-based (e.g. the UK and France) or focused on exporting capital goods (e.g. Germany and Japan), which are unlikely to recover to their pre-crisis levels by 2021’s end.
Consensus among many economists is that the South African economy is expected to register GDP growth in 2021. However, much of this growth will reflect base effects arising from the large 2020 contraction. PwC’s baseline forecast is for GDP growth of 3.4% in 2021, which is broadly consistent with the major banks' 2021 SA GDP forecasts. In addition to expectations of a third wave of COVID cases and associated lockdown levels, this outlook assumes the negative impact of continued load-shedding.
We expect that a return to pre-pandemic GDP is at least a few years away. Through this crisis, however, the major banks have demonstrated their intent to be part of the solution and, in doing so, accelerated digital strategies and fostered greater levels of public trust.
Rivaan Roopnarain, PwC Africa Banking Partner notes: “While considerable uncertainty, both from a public health and from an economic standpoint is expected to prevail, the major banks have shown their ability to respond purposefully to crisis conditions. For the majority of the major banks’ management teams and their people, 2020 will have been the most difficult and complex year on record. With various outlook scenarios dependent on a range of variables, the common consensus is that of more uncertainty ahead.”
Some of the major banks have cautiously indicated in their results announcements that they are hopeful to have seen the bottom from an earnings perspective. Early indicators emanating in Q1-21 show a sliver of positivity – with increased client activity, retail credit collections and early-stage debt relief showing a few promising trends.
As forward-looking expectations drove credit impairments in 2020, the major banks will hope that earnings trends return to more business as usual levels as impairments stabilise. Consequently, a strong focus on credit collections is likely to be a key theme of activity in 2021. Importantly however, just as data, models and expectations drove credit impairments in 2020, it will be data, collections and experience that will inform how impairment models adapt to changes in the environment going forward. Forthcoming data reads will therefore be closely tracked by the major banks to gain a fuller appreciation of credit performance.
Positive indicators come with heavy caution – as some commentators note that there is little to no pent-up demand seen on the immediate horizon: in their view, the economy is simply too weak and unemployment too high to contemplate what a meaningful recovery might look like.
In spite of the consensus for uncertainty to prevail, the characteristics that will support the major banks’ earnings profiles and drive growth into the future will be premised on a clear corporate and competitive purpose, a relentless mission to execute on strategies and leveraging technology and data-driven insights.
Senior Manager, Media Relations, PwC South Africa
Tel: +27 (0) 11 797 4470