Combined headline earnings of R14.6 billion declined 65.5% against 1H19, combined ROE of 5.4% (18.5% at 1H19), net interest margin of 392 bps (432 bps at 1H19), credit loss ratio of 232 bps (78 bps at 1H19), flat cost-to-income ratio of 55.1%
The major banks’ results for the period ended 30 June 2020 reflect the impact of the profound public health, social and economic strain brought about by the COVID-19 pandemic and resulting stresses to the operating environment. Against unprecedented levels of market turbulence and operating uncertainty, key themes emerging from the results include:
PwC’s Major Banks Analysis highlights key themes from the combined local currency results of Absa, FirstRand, Nedbank and Standard Bank.
External environment: The economic premise on which 2020 began in South Africa was deeply challenging. Commencing on the back of the slowest level of economic activity since the global financial crisis, the domestic economy registered a second technical recession in less than two years in Q4-19. By the time Q1-20 concluded, a global crisis of unprecedented pace, scope and impact was underway, engulfing economies and financial markets worldwide in a severe and synchronised downturn.
There is debate amongst risk professionals as to whether the COVID-19 pandemic reflects an unforeseeable cataclysm or a biological inevitability of unknown timing. In contrast, there is no debate regarding the devastating scale - yet to be fully measured - resulting from the pandemic-induced economic shock globally, regionally and domestically.
South African GDP contracted by 51% in Q2-20 on an annualised basis, representing a quarterly decline of a scale that dwarfs the annualised slowdown of 6.1% recorded in Q1-09 during the global financial crisis. By the time government restrictions were imposed in March, the unemployment rate was at 30.1%, a 17-year high, and is expected to register at significantly elevated levels for 2020.
Both globally and regionally, GDP growth over Q1-20 was broadly worse than expected with high-frequency indicators pointing to a more severe contraction in the second quarter.
Costa Natsas, PwC Africa's Financial Services Leader noted:
“The major banks’ results for the six months to 30 June 2020 are heavily impacted by the dire human, social and economic costs caused by the COVID-19 pandemic. While the scale and scope of these challenges are unprecedented, operating conditions were already constrained as the year began given a benign domestic economic climate and structural challenges that extended recessionary conditions into Q1-20. This set of major banks’ results reflect these challenges - amplified by the effects of the pandemic and resultant containment measures.”
Highlights from the major banks’ results include:
Francois Prinsloo, Banking and Capital Markets Leader for PwC Africa says:
“In a period of intense distress, the major banks quickly galvanised their focus towards the safety and adaptation of their workforces, ensuring operational stability and maintaining balance sheet resilience, while providing customer support through relief measures and partnering with government to protect the economy. As they’ve done this, return to growth strategies and adapting to a post-crisis world remain on the minds of bank management teams.”
As many contemplate how the pandemic will play out, while managing the fluidity of the situation, some commentators observe that any attempt at predicting when and how economies - and bank profitability - might return to pre-crisis levels is not an exercise in forecasting, but conjecture.
Due to the lack of precedent both in terms of the extent of the recession in 2020 and the scale of any partial rebound in 2021, estimation uncertainty and forecast risk remains significantly heightened. Expanding forecast time horizons amplifies macro forecasts, particularly as the effects of the crisis and its second-order effects extend beyond 2021.
The annual 2020 SA GDP forecasts of the major banks range from a decline of between 7% - 8.5%.
Rivaan Roopnarain, PwC Africa Banking and Capital Markets Partner notes:
“Aided by their investments in technology and focused efforts in enhancing customer experiences and offerings over recent years, the major banks have been purposeful in their responses to navigating the crisis. At the same time, these results reflect balance sheet strength, resilient operations and strong, trusted banking brands that were able to withstand severe economic shocks.”
In recognition of the wholly uncertain operating environment, the major banks have all withdrawn pre-crisis medium term financial targets. While maintaining run-the-bank operations, management teams have mobilised programmes of work to revisit longer term strategies, challenge and validate business and risk assumptions and devise new or redesigned strategies for a ‘post-COVID 19’ world - or at least one in which the current pandemic has rescinded to more stable virology. Doing so will require striking the difficult balance of risk, strategy and resilience in an unprecedented climate.
Aiming for renewal and revival - not just survival - may be where leading banks will focus their strategic lenses as they navigate, recover and restore their operations through the current crisis.
We believe the banks that will best navigate through and emerge from the current crisis will be those that maintain the financial and operational resilience to deal with heightened profitability risks and non-performing loan formation, while leveraging crisis learnings to underpin a reimagined strategy. Strategies predicated on customer-centricity, responsiveness to demographic shifts and evolving customer expectations while still maintaining pace with technological change are those that will best provide a foundation for success.
Senior Manager, Media Relations, PwC South Africa
Tel: +27 (0) 11 797 4470