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Nedbank, which reported a 7% decline in headline earnings for the 2019 financial year, says more South African consumers and businesses are struggling to service their debt.
The bank, which is South Africa’s fourth largest in terms of its market capitalisation of around R83 billion, recorded a 66% jump in impairments in the year ended in December.
"As the economy continues to deteriorate, we’ve seen more clients continue to show some stress -and, therefore, impairments increasing," said Nedbank CFO, Raisibe Morathi.
The green bank’s share price slid as much as 7.5% on Tuesday morning after the release of the results, which also showed that its credit loss ratio had climbed to 82 basis points (bsp) from 53 bsp in December 2018.
The other retail banks are yet to report their full year results for 2019, while for those who have, their year only ended in June. But the last set of results for the other big three also showed a deterioration in their impairment levels and credit loss ratio. Absa’s stood at 97 bsp in June; FirstRand’s was 88 bsp, which increased to 99 bps when excluding the UK business Aldermore; and Standard Bank’s stood at 76 bsp.
Some of this was deterioration was attributable to the adoption of International Financial Reporting Standard (IFRIS 9), a new accounting standard that requires banks to book higher impairment charges than before. But in Nedbank’s case, IFRIS 9 adjustments were done in 2018. The 66% jump in impairments was on a like-for-like basis, meaning that it was more a function of customers defaulting on their loans.
"What actually created a large percentage increase in impairments is the lumpy transactions in CIB (Corporate and Investment Banking). Our CIB impairment increased by 100%. There were three counters who were responsible for about half-a-billion of the impairments," said Morathi.
She said the clients responsible for most of the impairments in the CIB business were in the construction and cement sector, as well as retail and telecommunications.
Further deterioration
"They experienced a tough environment in their own operational environment. These are not clients that were new in terms of our watchlist, but their credit situation just deteriorated further, moved to stage 3 and picked up additional impairment," she added.
Banks move clients to stage 2 impairments when the environment they operate in becomes more challenging and there is a likelihood that they might default on their loans. They move to stage 3 impairments once they’ve missed more than three payments.
Morathi said while the move to stage 3 impairments was amplified in the CIB business because its clients are big, there was an increase in people moving to stage 3 across the group. As a result, the group’s non-performing loan ratio moved to 3.6% from 3.5%.
In the retail banking business, Morathi said defaults increased across all the different segments but motor vehicle finance and the personal loan portfolios showed more uptick.
"It’s across the board as illustrated by a number of layoffs, as we are seeing a number of companies retrenching. The big salary increases are few and far in between. The cost of some of the services like electricity is increasing. So, the cost of living in general is putting people under pressure in terms of servicing their debt facilities," she said.
Morathi said given the currently lower expectations of GDP growth than predicted at the beginning of 2019, the bank took a decision to book an additional R250 million as a "central impairment charge" to anticipate "some risks that have emerged but may have not yet come through to our books".
The SA economy shrank by 1.4% in the fourth quarter of 2019, according to new Gross Domestic Product numbers released by Statistics SA on Tuesday.
