South African banks face the steepest earnings slump in half a century — with some posting losses — as measures to curb the coronavirus drag the economy deeper into recession and lead to a surge in bad debts.

“I have looked at each and every crisis in the last 50-odd years and there is nothing this severe,” said Corné Conradie, an actuary and partner at auditing and consultancy firm PwC in Johannesburg. “The potential drop in GDP is bigger than any of the previous stresses.”

Only one of the big four banks has reported an adjusted net-income loss since 1992, when Bloomberg began compiling data. That was in 2003, when Nedbank Group set aside more money for taxes, wrote down technology investments and changed accounting policies. Standard Bank Group reported its sole annual-profit decline in 2010 in the wake of the global financial crisis, while FirstRand’s earnings shrank in 2008 and 2009.

Fast forward to this year and South Africa’s GDP could contract 7%, according to the central bank, as government restrictions keep businesses closed and consumers at home to slow the spread of Covid-19. The outlook is so uncertain that the best estimate banks, including Absa Group, can give is that profit will be down at least 20%.

“The earnings for the banks to June will be substantially down,” said Jan Meintjes, a portfolio manager at Cape Town-based Denker Capital. “Is it going to be closer to 30%, 40% or 70%? No one knows.”

The banking regulator — while lauding the industry’s high capital and liquidity buffers — is also bearish. On a call with investors last week, Prudential Authority CEO Kuben Naidoo said banks could make losses as an increase in expected loan defaults result in higher provisions.

‘Substantially worse’

Banks are making less revenue from interest charges following a drop in benchmark rates to a record low, transactions have slowed due to the lockdowns and a surge in job losses will make it harder for customers to repay debt.

While losses may not come in the first-half cycle, they’re not completely out of the question for the second, said Meintjes. “That will be because of the reality of the actual bad-debt experience, emerging to the latter part of the year being substantially worse than what the models indicated mid-year.”

Most major shocks to South Africa’s finance system have been isolated.

The 2014 collapse of African Bank Investments was caused when bad debts spiralled and debtholders stopped funding the unsecured lender. Saambou Holdings folded in 2002 after customers lost confidence and withdrew their savings. In March 2018, VBS Mutual Bank was taken over by administrators amid allegations of fraud.

The banking industry should remain profitable if credit-loss ratios are in line with the global financial crisis, when earnings fell by around 30%, and banks continued to pay dividends, said Renier de Bruyn, an analyst at Sanlam Private Wealth.

Standard Bank and Absa said they expect impairments to soar to levels above what was seen when the subprime crisis in the US sent shock waves throughout the world. All the banks barring FirstRand, the only one to report earnings in the 12 months to June, have scrapped interim dividends.

With fairly diversified portfolios, banks could be impacted differently, De Bruyn said. “We may see the residential mortgage books perform better in the current crisis,” he said. “But commercial and consumer loans could perform worse than in the global financial crisis.”

In research spanning South Africa’s five largest full-service banks, which together own 94% of the industry’s loans, stress testing by PwC, even under the worst scenarios, found the industry will remain resilient through the Covid-19 crisis. The companies make at least R80-billion in profit on a credit book of just over R4-trillion, Conradie said.