Harry Botha, an analyst at Anchor Stockbrokers, believes the sector is well placed for strong earnings growth over the next three years. Although looming interest rate hikes are set to raise the prime lending rate further, Botha says his analysis reveals a manageable increase in credit impairment charges in the year ahead.

The prime lending rate has increased by 325 basis points over the past year, moving to 10.5%, which translates into a monthly repayment increase of more than R3,000 on a R1.5-million home loan.

“Usually when interest rates go up, affordability becomes an issue and the economy slows down somewhat, but we feel that banks became a bit more cautious on the back of Covid, so the lending growth has not been exceptionally high in recent years,” he says.

Botha singled out Standard Bank and Nedbank as his top picks in the sector. 

“The diversification and scale of Standard Bank’s Africa operations is an important advantage for the bank compared to other multinational banks. 

“We expect Standard Bank to deploy its excess capital in its African operations, particularly through corporate investment banking [CIB] lending and deal flow, with the company achieving its targeted return on equity in the 2024 financial year,” he said.

When it comes to rival Nedbank, Botha notes that the bank is delivering on its profitability and growth targets through investments in its retail and business banking and CIB operations. 

When it comes to the newer challenger banks, such as TymeBank and Bank Zero, Botha anticipates more customer growth in 2023, as in previous years, although he doubts the numbers will make a significant dent in customer numbers for the traditional listed banks.

Interest rate benefit

Michele Santangelo, a portfolio manager at Independent Securities, said that looking back at 2022, banks fared better than the broader market as they benefited from the rise in interest rates after many years of artificially suppressed yields. 

“The rise in interest rates benefited banks both from a global and South African perspective as net interest margins expanded, adding to banks’ earnings despite an environment of pressure on the broader markets earnings growth,” he says.

Speaking towards the end of November last year, Arno Daehnke, Standard Bank’s group financial director, pointed out that over the 10 months to the end of October — from a currency perspective — the rand was relatively weaker than currencies from the group’s other operational areas, which had favourably affected earnings growth.

“In the [10-month period], robust average balance sheet growth, combined with positive endowment tailwinds from higher average interest rates, resulted in strong double-digit net interest income growth period on period. Transactional fee growth benefited from fee increases combined with a larger client base,” he said.

Credit impairment

When it came to credit impairment, Daehnke’s views confirmed Botha’s outlook. 

“Group credit impairment charges increased, influenced by the low base in the second half of 2021. The consumer and high net worth portfolio continued to benefit from better collections and the ongoing normalisation of previous payment holiday portfolios.

“This was partially offset by increased impairment charges from new business strain as well as pockets of customer strain,” he said. 

In the business and commercial client segments, credit impairment charges were broadly flat. Daehnke said credit charges in South Africa had declined as provisions raised on the Covid guarantee lending in the prior year did not repeat.

Capitec, which is a major player in the lower to middle-income market, wrote off R2.5-billion worth of bad debts in the six months to end August, due to lower write-offs of Covid-related reschedules. 

Bad debt write-offs in the six months to end August 2021 were R3-billion. This was because the value of Covid-related reschedules in stage 3 of the loan book diminished over time. However, chief executive Gerrie Fourie says the bank did see higher debt review balances at R5-billion, compared to R4.5-billion in the comparative period for 2021.

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First National Bank, which sits in the First Rand stable, noted a “normalisation of the credit cycle and an improvement in portfolio credit quality” in its results for the year to June 2022. 

At the time, the bank said it had raised certain model adjustments to ensure adequate coverage for the current stressed environment, enhancing coverage relating to loss given default levels in its secured portfolios and industry-specific stresses in the affected commercial sectors. 

According to the results statement, impairment models were further calibrated to be more sensitive to certain forward-looking macro forecasts. 

“Collections across all product portfolios performed well, with arrears levels reducing in various portfolios. The current debt relief portfolio continues to perform better than expected,” the results statement noted. 

FNB’s outstanding debt-relief advances stood at R2-billion as at 30 June, while the non-performing loans ratio had reduced to 6.47% from 8.12% the previous year. Management attributed the improvement to effective credit management strategies and good customer curing due to focused collections.

Absa’s chief executive, Arrie Rautenbach, says the bank had pre-empted the inflationary cycle, employing more caution on the unsecured lending side. 

“We are seeing an increase in that book going forward. [However], we are comfortable with our risk appetite,” he says. BM/DM