After an unexpected profit warning by the Absa Group this week, banking analysts have questioned whether mortgage defaults are on the rise.
Or whether provisions for bad debt were simply not conservative enough.
Absa issued a profit warning on June 26, leading to panic selling on the JSE as investors sold the shares of both Absa and other major banks.
In an unscheduled “voluntary” trading statement, Absa chief executive Maria Ramos said the profit slump was as a result of more write-offs relating to mortgage defaults, aggravated by subdued asset and revenue growth in the first five months of last year.
Within hours of the statement, the combined market capitalisation of South Africa’s big four banks fell by R16-billion. Absa suffered the most with losses of R8-billion.
Headline earnings for the six months ending June 30 are likely to be 0% to 10% below the R4.6-billion achieved in the first half of last year, Absa warned. Although last year’s annual headline earnings had shot up by an impressive 21%, Absa denied that the profit slump arose from overstated earnings in the past.
A number of banking analysts told the Mail & Guardian the problem was more likely to lie with Absa than in the banking sector as a whole, but upcoming results for the big four would provide a clearer picture.
Absa said it could not comment on how its provisioning model compared with those used by other banks, but said “economic conditions continue to be difficult and distressed customers remain under pressure. Given these conditions, we believe we are taking appropriate measures.”
Absa’s parent company, Barclays, was also in the spotlight when the bank, whose headquarters are in London, not only received a rating downgrade from Moody’s last week, but on June 27 also announced it had settled for a £290-million fine following allegations that its traders had manipulated interbank lending rates.
The fine followed an investigation into allegations that Barclays was party to manipulating this $550-trillion market for almost a half-decade.
According to figures from the banking supervision department at the South African Reserve Bank, bad debt relating to mortgages is declining. In a 2011 annual report, released on June 1, the department found that retail mortgage defaults, the largest component of total retail defaults, peaked at R77-billion in April 2010 and subsequently declined to R60-billion in December last year, a fall from 8.6% of total loans to 6.9%.
Banking supervision data indicated that home loans and commercial mortgages comprised 42.5% of all gross loans and advances in 2011 – by far the biggest portion.
Loans and acceptance
According to a banking report released by PricewaterhouseCoopers in March, Absa’s gross loans and acceptances stood at R573-billion last year with impairments of just more than R12-billion and nonperforming loans accounting for 6.2% of all advances.
First Rand’s gross loans and acceptances totalled R508-billion in 2011 and impairments neared R10-billion at the end of the year, PricewaterhouseCoopers reported. Nonperforming loans, as a percentage of advances, were at 3.6%.
Nedbank’s gross loans and acceptances were R507.5-billion, with impairments worth R11.5-billion and nonperforming loans comprising 4.5% of the total, according to PricewaterhouseCoopers.
Standard Bank, said Pricewater-houseCoopers, had gross loans and acceptances totalling R819-billion, with impairments of just more than R15-billion and nonperforming loans as little more than 4% of the sum.
In a report released in March this year, Fitch Ratings warned that major South African banks were likely to need higher levels of provisioning for their nonperforming residential mortgages.
The PricewaterhouseCoopers report put Absa’s collective provisions at R2.2-billion at the end of last year, First Rand at R3.7-billion, Nedbank at R2.7-billion and Standard Bank at R5.4-billion.
Absa will release its latest financial results next month, Nedbank and Standard Bank in August and First Rand in September.