The South African major banks have a consistent track record of generating profit growth in relatively close proximity to domestic annualised GDP growth, as depicted in Figure 2.1. This track record — reflecting a three-year compound annual growth rate (CAGR) of 7.3% — has been disrupted in 1H20 owing primarily to a sharp increase in credit impairment charges under IFRS 9’s expected credit loss model.
Cost-to-income ratio analysis
A perennial focus for the major banks over recent reporting periods has been tight cost control and disciplined management of the overall cost base. Notwithstanding the uncertain operating environment that prevailed over 1H20, the major banks cut expenses by a combined 3.5% against 1H19 (2.9% against 2H19). The combined cost-toincome ratio improved from 56.2% in 2H19 to 55.1% in 1H20 and remained flat against 1H19.
Notwithstanding the crisis conditions and elevated levels of operating uncertainty that prevailed over 1H20, the aggregate loan portfolio registered growth of 8.0% against 2H19. This was driven primarily by corporate and interbank balances, as well as resilient loan growth in regional operations outside South Africa.
Impairments and coverage ratios
Given the front-loaded nature of expected credit loss estimation under IFRS 9, the combination of a markedly worse economic outlook, deteriorating customer risk profiles and pandemic-induced social containment measures resulted in the combined bad debt charge increasing 3.3 times relative to 1H19. These elevated impairment levels were last seen during the global financial crisis. Increased impairments deteriorated the combined credit loss ratio to 232 bps (78 bps at 1H19 and 83 bps at 2H19).