South Africa’s largest bank issues profit warning as unsecured loans bite

A financial services group and Africa’s largest lender in terms of assets, Standard Bank warned on Wednesday (March 3) that it planned to report a substantial drop in profits for the fiscal year ended December 2020 as it struggled with unsecured loans.

The lender said it expects net earnings per share to be 40% to 50% lower, while earnings per share are expected to be 45% to 55% lower than in 2019.

Standard Bank warned at the end of November last year that it had identified pockets of pressure in its Personal & Business Banking (PBB) portfolio, particularly in unsecured personal loans.

An unsecured loan is credit given by the lender that does not require any type of collateral. Instead of relying on the borrower’s assets as collateral, lenders approve unsecured loans based on the creditworthiness of the borrower. These loans can include personal loans, student loans, and credit cards.

The bank said in November that balance sheet growth had slowed, that pressure on margins continued, as the impact of previous interest rate cuts filtered out. The country’s repo rate is at an all-time low of 3.5%, after numerous cuts in recent quarters, in an attempt to revive a stagnant economy. The prime loan rate is 7%.

Moody’s Investors Service warned at the end of January that 2021 will be a difficult year for the country’s banks, as trading conditions remain difficult.

The outlook for the South African banking system is negative, due to persistent difficult operating conditions, deteriorating loan performance and declining profitability, Moody’s Investors Service said in its report. Stable bank funding, good liquidity and capital buffers will mitigate risk and protect financial stability.

Overall, operating conditions will remain weak for South African banks over the projection period, with economic activity remaining subdued amid limited progress on economic reform. Weakened businesses and households, along with moderate business opportunities, will hurt banks’ financial performance.

“We expect loan performance to deteriorate in 2021, problematic loans will continue to grow beyond the 5% gross lending reached in November 2020, as corporate and household balance sheets are stretched by weak profits and disposable income, ”said Constantinos Kypreos, senior VP at Moody’s Investors Service.

“That said, good bank risk management, low interest rates and government support measures should help contain the deterioration and keep NPLs at single digits.

Lower dividend payouts and other capital enhancement measures will help keep capital parameters at current levels, Moody’s said.

Standard Bank said in November that its position on declaring a final dividend for the full year 2020 had not yet been finalized.

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