Banks optimistic on economy despite fears that SA is becoming a failed state

You would never know how worrying South Africa’s near-term economic outlook is by looking at the latest financial results of the country’s major banks. 

FirstRand (the owner of FNB, WesBank and RMB), Standard Bank and Absa have published financial results in recent days, which indicate that their operations have recovered from the pandemic. In fact, their profits and lending functions are back to pre-pandemic levels.  

The banks are also sounding an optimistic note about the economy in 2022, despite many warnings that South Africa is becoming a failed state. One of these warnings came from National Treasury director-general Dondo Mogajane, who recently said the country was showing signs of a failing state – more common in countries such as Sierra Leone and Liberia. 

Mogajane, who was speaking at a Deloitte post-budget discussion in early March, and quoted by the TimesLIVE, said South Africa was showing characteristics of a failed state because “we don’t care about the poor and improving their lives”.  

Commercial banks are not ready to make this conclusion as they still see many promising green shoots. For starters, their economic growth outlook for 2022 is glowing. Absa is the latest bank to offer its outlook: it expects the economy to grow by 2.1% in 2022, in line with Treasury’s expectations.  FirstRand and Standard Bank expect similar growth of 2.2% and 2%, respectively. 

Banks are not oblivious to challenges facing the economy, as they have identified several risks that might stunt growth, including Eskom’s load shedding, Russia’s war against Ukraine and a potential fifth wave of Covid-19 infections which Absa’s actuaries expect to hit South Africa as early as April. 

Jason Quinn, Absa’s acting CEO, sees more downside risk than upside potential to South Africa’s economic outlook.  

“The downside risks could snowball quickly. Eskom’s operational challenges and debt burden remain a key risk to growth. The fifth Covid wave is expected to emerge as soon as next month and its impact is uncertain,” Quinn said on Monday after the company published its financial results for the year to December 2021. 

He said factors that could help the economy return to pre-Covid levels include the commodities boom that is expected to still support South Africa in 2022, increased exports, strong production levels in the agricultural sector and infrastructure investments led by the government. 

Quinn also expects renewed investments from the private sector on the back of President Cyril Ramaphosa’s programme of implementing pro-growth and investment structural reforms. 

This optimism has also been peddled by Standard Bank after it recently released its financial results for the year to December 2021.

Lungisa Fuzile, CEO of Standard Bank’s South Africa operations, said many of the bank’s corporate clients were ready to unleash investments into the telecommunications and energy sectors after the release of broadband spectrum and the government’s move to allow private players to generate electricity for their own needs up to 100MW. 

The bank expects an investment boom in the next few months that will help support the country’s broken economy. 

Recovery from the pandemic 

At the start of the pandemic in March 2020, banks sacrificed higher profits and pencilled in losses when they offered a range of relief measures for struggling consumers and businesses, including payment holidays on debt payments, waiving various bank charges and offering government-guaranteed loans at favourable interest rates. 

With life returning to normal under less restrictive lockdown measures, banks have been able to recover from pandemic-induced financial losses. 

Absa’s profit after tax for the year ending December 2021 tripled to R19.4-billion. Absa’s Quinn said the bank was “well in excess” of 2019 earnings. Over the same period (12 months to the end of December 2021), Standard Bank’s profits doubled to R28-billion. 

Standard Bank expects to record earnings above 2019 levels by the end of this year. FirstRand’s profits grew by 40% to R16.7-billion during the six months to 31 December. Granted, FirstRand’s reporting period is not comparable to that of Absa and Standard Bank. 

Other metrics of banks are heading in the right direction. 

More consumers are in an improved financial position to service their debt, prompting banks to make fewer provisions for bad debts (debt not paid on time).  

At Absa, credit impairments slumped 59% to just under R8.5-billion. At Standard Bank, credit impairment charges fell by 52% to R9.9-billion. And at FirstRand, total impairment charges fell by 57% to just over R4-billion.

Lending to consumers and businesses is growing. The extension of loans to Absa customers grew by 7%, with vehicle asset finance and home loans leading the pack. Standard Bank’s loan advances grew by about 14% and 6% for FirstRand (excluding its UK operations).  

All three banks expect similar levels of growth in their operations for 2022. DM/BM