Banking on better days
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Banks and financials fell 7,5% and 5,5% respectively last week as the 2020 earnings season revealed what many had feared, the bulk of the banks suffered swinging losses due to Covid.
According to an overview of banks’ results by PwC, aggregate headline earnings for all of the banks declined by more than 48% in 2020 compared to the previous financial year, return on equity more than halved from 17.8% to 8.3%, and provisions for bad debt increased by 2.5 times.
The first rule of banking is always say no. And there is good reason that bankers have earned the reputation of being fair weather friends.
You have to understand a bank’s balance sheet. A bank is THE most highly geared entity in the world – it operates on a thin sliver of capital and the rest is equity. If bank has a bad debt, a non performing loan, it has to do a deal roughly 33 x times bigger to recoup the original loss
If you lend out say R100 at 10% prime to use rounds numbers for the example, and the bank borrows at 7% the repo rate, the profit on that loan is only R3. So you lose that R100 and you have to a deal 33 times the original deal size. It’s why credit vetting matters and why banks are and were unsuited to the task of the treasury loan guarantee scheme.
Michael Avery spoke to Costa Natsas, financial services leader of PwC Africa, & Nolwandle Mthombeni, senior banks analyst at Intellidex, about what we can learn from this earnings season.
According to an overview of banks’ results by PwC, aggregate headline earnings for all of the banks declined by more than 48% in 2020 compared to the previous financial year, return on equity more than halved from 17.8% to 8.3%, and provisions for bad debt increased by 2.5 times.
The first rule of banking is always say no. And there is good reason that bankers have earned the reputation of being fair weather friends.
You have to understand a bank’s balance sheet. A bank is THE most highly geared entity in the world – it operates on a thin sliver of capital and the rest is equity. If bank has a bad debt, a non performing loan, it has to do a deal roughly 33 x times bigger to recoup the original loss
If you lend out say R100 at 10% prime to use rounds numbers for the example, and the bank borrows at 7% the repo rate, the profit on that loan is only R3. So you lose that R100 and you have to a deal 33 times the original deal size. It’s why credit vetting matters and why banks are and were unsuited to the task of the treasury loan guarantee scheme.
Michael Avery spoke to Costa Natsas, financial services leader of PwC Africa, & Nolwandle Mthombeni, senior banks analyst at Intellidex, about what we can learn from this earnings season.