Finance group Nedbank has flagged a massive increase in credit impairments in the first half of the year, emanating largely from its consumer retail banking segment.
Reporting its interim results for the six months ending 30 June 2023, the group said that credit impairments rose 57% over the period, which had a notable cooling effect on its otherwise strong performance.
According to Nedbank, the rise in impairments – which increases the likelihood of clients defaulting on payments – comes as a result of the impact of higher interest rates, higher levels of inflation and record levels of load-shedding on clients, particularly retail customers.
The bank said that this is reflective of the challenging economic environment in South Africa, which ended up being more daunting than initially forecast.
“In addition to a weak global economy and lower commodity prices, domestic economic activity continued to be negatively impacted by very high levels of load-shedding, logistical constraints, higher-than-expected levels of inflation and as a result higher-than-expected rises in interest rates,” the group said.
“The slow progress made in improving outcomes on key issues of energy security, transport and logistics, and crime and corruption, coupled with the potentially severe economic consequences of the United States reaction to South Africa’s alleged compromising of its non-aligned stance in relation to the Russia-Ukraine conflict, has added further to SA’s country risk premium, increasing bond yields and resulting in a deterioration in the value of the rand against foreign currencies.”
Nedbank warned that things don’t look much better for the remainder of the year either. The group still maintains a reasonably bearish outlook on key economic indicators, anticipating low growth (0.3% for the year) and elevated inflation levels. However, more positively, it does not see any more interest rate hikes.
“Looking forward, we currently expect the economic environment in South Africa to remain very challenging, particularly given the high levels of electricity shortages and increased levels of pressure on consumers’ disposable income,” it said.
Nedbank is just the latest finance group to sound the alarm on deteriorating conditions for households in South Africa.
Earlier this week, Standard Bank also flagged a significant rise in credit impairments in its operations, noting that these have already risen 50% in the first five months of the year.
“Credit impairments related to consumer banking customers are currently elevated, primarily in South Africa and, particularly, in home loans, on the back of rapid interest rate hikes and sustained high inflation levels, which has resulted in some customers being unable to meet their debt obligations in full,” it said.
Meanwhile, African Bank said in its latest results that its impairment charges on loans and advances grew by an extraordinary 240% to R2.24 billion (H122: R658 million).
In its annual financial results for the year ending February 2023, Capitec also noted that its total net credit impairment charges on gross loans and advances grew by 80% to R6.4 billion (2022: R3.5 billion).
Despite the hit from credit impairments, Nedbank still recorded a solid set of results in the six-month period.
Headline earnings increased by 10% to R7.3 billion for the period, and return on equity rose to 14.2% from 13.6% before.
Revenue increased 13% to R33.7 billion (June 2022: R29.7 billion), and headline earnings per share rose 11% to 1,525 cents (2022: 1,370 cents).
The group declared an interim dividend of 871 cents per share, up 11%.
While record levels of load shedding had a limited impact on Nedbank’s operations, the group noted that – on top of hitting the consumer segment – there was a notable impact on the SME and business segments.
However, with the negatives, the group said that it has also led to a strong drive for investment in renewable energy and private power generation projects. These provide “a large financing opportunity” for the bank, it said.
“While it should never have happened, load-shedding has increasingly become a catalyst for renewable- and embedded-energy investments to support both SA’s Just Energy Transition and for individuals and companies to reduce costs and reduce their dependency on electricity supply from Eskom,” said Nedbank chief executive, Mike Brown.
“This is creating a strong runway for bank advances growth in this sector.”
However, despite the opportunities, electricity outages adversely impact business and consumer confidence, as well as increase inflation, and, as a result, limit GDP growth, he said.
“From an SME perspective, load-shedding is making it increasingly difficult to start a business,” Brown said.
Load shedding has impacted businesses’ credit quality, and disrupted various industries from agriculture to tourism while forcing companies to incur additional costs.
“The shortage of electricity supply – and hence very high levels of load shedding – is currently
the most material constraint on GDP growth,” Brown said.
“Urgent and decisive action is required by government, labour, civil society and business to unlock SA’s undoubted economic potential and ensure higher levels of sustainable and inclusive economic growth.”