Absa and Nedbank’s interim results paint a bleak picture of the financial health of South African consumers. Throw in updates from two more bellwether stocks — Italtile and Cashbuild — and the stress they’re under becomes that much clearer.
“The consumer in South Africa [has] had to deal with very difficult circumstances,” Absa CEO Arrie Rautenbach told analysts on Monday. “Their liquidity balances show strain.”
Consumers have been beset by rolling power outages, high interest rates, rising food and fuel costs, runaway crime and job insecurity.
“It will remain tough for the rest of the year and into next year,” Nedbank CEO Mike Brown tells the FM. At least there is a ray of light: “We think interest rates have peaked at current levels,” he says.
The gloom pervades the retail sector, where hardware outlets Cashbuild and Italtile alerted the market to lower profits earlier this month. In Cashbuild’s case, the retailer expects a 75%-80% drop in earnings per share for the year to June 25, whereas Italtile expects an 11%-16% decline for the year to end-June.
Brown says there are three ways to place consumers on a better footing.
“First, you need to get the inflation number lower, especially for food and fuel.”
That’s easier said than done. Saudi Arabia said last week it plans to cut oil output by 1-million barrels per day. This even as the price of crude has been firming, rising almost 9% in the past month to $84.76 a barrel. Coupled with a weakening rand — it lost 6% over the past 30 days — the outlook for local fuel prices is bleak. On August 14, the Central Energy Fund said there was a R1.39/l underrecovery on petrol and R2.58/l on diesel — early indications of price increases in September.
The outlook for food prices, on the other hand, seems more benign. The price of wheat traded on the Chicago Board of Trade touched $6.15 a bushel — half the price of a year ago — on expectations of a bumper crop in Russia.
“Next, interest rates need to decline,” says Brown. While no cuts are expected yet, the Reserve Bank is at least likely to hold off on any further hikes this year. The Bank’s policy repo rate has jumped 475 basis points since November 2021.
The pause in the hiking cycle heightens our conviction that a nominal repo rate of 8.25% marks the peak in the cycle, with a prolonged pause in the policy rate in the months ahead
— Futuregrowth Asset Management
“The pause in the hiking cycle heightens our conviction that a nominal repo rate of 8.25% marks the peak in the cycle, with a prolonged pause in the policy rate in the months ahead,” Futuregrowth Asset Management told clients on Tuesday.
Even if rates aren’t lifted further, the damage has been done: “Many customers would have seen their monthly home loan instalment increase by 40%,” says Absa CFO Jason Quinn. But Absa is “not seeing large numbers of repossessions”.
Still, Absa’s credit loss ratio on home loans more than trebled to 0.65% in the six months to end-June from 0.19% during the comparable period a year earlier. At Nedbank, the ratio shot up to 0.98% from 0.19% the year before.
It’s not as if higher interest rates have been all bad for banks: the “endowment effect” helped Absa post a 16% jump in net interest income to R33bn from a year earlier as its net interest margin (the difference between interest charged and paid) widened to 4.61%. Nedbank’s net interest income jumped 18% to R20.3bn from a year earlier with its net interest margin increasing to 4.18%. Absa’s total net loans and advances grew 8% to R1.25-trillion, whereas Nedbank saw a 5% expansion in gross loans to R876bn.
For both banks their large corporate and investment banking units were their saving grace. In the case of Absa, this segment contributed 52% of its earnings whereas Nedbank’s comparable unit contributed almost 45% of headline profit.
“More corporates, bar some single names, were more cautious in borrowing following the Covid pandemic,” says Stefan Swanepoel, equities analyst at M&G Investments. “They had more cash on hand. They’re not in the same situation as consumers.”
That may be for now. The question, however, is to what extent South African businesses can government-proof themselves: including private security, self-generation of electricity, road logistics and, inevitably, self-supply of water.
In electricity generation at least, there seems to be some success. “Parts of the economy are becoming more resilient to [rolling power blackouts],” Rautenbach says.
Nedbank estimates that installed rooftop solar generation capacity increased 350% to 4,400MW since March last year whereas registered private renewable energy generation jumped 150% to 4,500MW.
And, according to both banks, the scope for further investment in clean energy is nigh limitless. The funding for larger commercial generation projects is typically handled by the lenders’ corporate and investment banking units.
Nedbank has identified a pipeline of renewable energy projects worth R24bn, with R28bn already exposed to the sector. Absa also sees “significant growth in this space over the medium term”, according to Rautenbach.
But any real growth for the banks hinges on the government jump-starting the economy. “We need to see higher economic growth and employment,” Brown says. “For this year, we expect 0.3% growth, which is lower than population growth, meaning we’re getting poorer on average. Currently, economic growth feels capped.”
Absa is a bit more upbeat on the outlook for the economy, with the lender expecting GDP growth of 0.7% for the year.
Both sets of results seem to have halted a latent rally in banking shares, though year to date, the difference between the best and the worst performers is vast.
Absa is down 7%, Nedbank has lost 6.2% and Capitec has slipped 5.3%. FirstRand, on the other hand, has seen its shares gain 17.8% since the start of the year (dividends included), while Standard Bank has rallied 18.5%.
While Absa is expecting a slight recovery in the second half, there is “some scepticism” about that, says Umthombo Wealth portfolio manager Alex Duys, who argues that a pullback in banking stocks is warranted.
“South Africa’s banks are well provisioned and capitalised, but I do think the easy money has been made.”
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