Asked and answered – banks clear their own hurdles!
The difficulty in allowing someone to set and measure their own performance is fairly obvious – except if you’re an international banker! On 23 July the Committee of European Banking Supervisors released the results of their so-called ‘stress test’, announcing that 84 of 91 European banks passed with flying colours. Analysts wasted little time in letting the world know what they thought of the situation. Not only had the supervisors set the core capital adequacy ratio too low, at a mere 6%, but the test process was ambiguous and lacked transparency. The consensus is – great test result or not – these banks are in for a period of prolonged instability.
Are local banks going to suffer a similar fate? It is common knowledge South Africa’s big four banks entered the global economic turmoil with strong balances sheets. But we also know local consumers are under tremendous pressure, with as many as 400 000 homeowners facing the unpleasant possibility of their homes being repossessed. Banks are deposit taking institutions that generate income from lending out these deposits at more attractive interest rates – so any hiccup in their retail business (mortgages, hire purchase, credit cards and personal bank accounts) is going to filter through to the bottom line. Let’s see what we can learn from Nedbank’s latest set of interim results.
Is it business as usual?
Nedbank is one of the country’s top four banks, comfortably nestled in the Old Mutual stable. At first glance its performance for the half year to 30 June 2010 is heartening. Headline earnings were 8.3% higher at R2 153 million with a moderate 0.2% improvement in headline earnings per share, to 475c. Patient shareholders were rewarded with a 212c/share dividend. The group claims its net asset value per share is 6.6% higher at R93.97, still well below the latest R136 share price. One of the highlights during the period is the strong capital adequacy achieved by the group – with 9.9% on the core Tier I capital level. We guess Nedbank would pass the European Banking Supervisors’ exam with ease!
Nedbank’s management is painfully aware of the group’s difficult operating environment. They say full year results will borrow heavily from global economic developments – in other words – for as long as commodity prices improve and inward capital flows continue unabated the company will prosper. The trouble is international prospects remain very uncertain. Instead of talking about the pace of the recovery, international market commentators are speculating at the possibility of a ‘double dip’ recession. And things aren’t much better on the domestic front.
Nedbank has much of its hopes pinned on continued improvements from consumers – predicting improvements in retail operations as “household credit demand improves, house prices edge higher, and impairments moderate. But despite being knee-deep in low interest rate and low inflation territory, local consumers have been reluctant to participate in the domestic economy thus far. They’re simply snowed in under record levels of debt. The stumbling block for local consumers is the high household sector debt-to-disposable income ratio of 78.4% in Q1 2010 combined with the 12.7% cost of servicing household debt burdens!
A nasty ‘bad debt situation’
Banks have been blindsided by the extent of consumer woes, as demonstrated by their burgeoning credit impairments. They thought they could take a big hit in FY2009 and begin 2010 with a clean slate. But the problem is way bigger than in previous ‘bad debt’ cycles. The struggling consumer is one of the main reasons for Nedbank’s cautious outlook for the remainder of 2010. They warn shareholders to expect slower credit advances, continued margin compressions, a slow improvement in the credit loss ratio, expense growth in the year in the early double digits and net investment return in the mid double digits. It’s not good news!
And there’s another twist. While banks try to clear up the mess created during the last credit extension boom, they’re issuing new loans at a pedestrian pace. The total value of mortgage advances outstanding came in at 3.4% year-on-year in June 2010. And the improvement in total new mortgage loan payouts, up 9.5% to March, is painfully slow. StanLib economist Kevin Lings adds some fuel to the debate. He says the overall trend in money supply growth is very subdued – though the annual rate of change is expected to continue to trend higher during the remainder of 2010.
Don’t expect fireworks in FY2010
Private sector credit for June 2010 was a modest R8.6bn, while mortgage credit rose only 0.2% month-on-month to R2.02bn. “This is still an extremely modest rise, although it represents the 11th consecutive monthly increase in mortgage activity, off an extremely low base,” comments Lings. There is hope, however, that this gradual improvement will further lift activity in the housing market. “Credit demand is still not gaining any significant upward momentum and, certainly, credit growth has lagged the overall economic recovery,” says Lings. This completes the ‘catch 22’ we hinted at earlier – banks can’t fix their business by lending more, because they’re trying to fix the businesses by reining in bad debt!
If Nedbank’s results are anything to go by we can expect modest improvements in earnings from banks this year. Management can promise a swift recovery when the economy fires again, but it means nothing if they can’t tell use when the recovery is likely to happen.
Editor’s thoughts: Banks are being punished for their reckless lending practices through the boom times of 2002 to 2007. There are still thousands of mortgages and unsecured loans in the hands of poor payers. Do you believe we’ve seen the worst of the current ‘bad debt’ cycle? Add your comment below, or send it to [email protected]
