This analysis is by Bloomberg Intelligence Senior Analyst Philip Richards and Senior Associate Analyst Lea El-Hage. It appeared first on the Bloomberg Terminal.
South African banks’ two-year cycle of consensus EPS upgrades, based on one-year forward estimates, could turn negative in 2H as economic conditions deteriorate and rate hikes end. Ailing state power generator Eskom’s $23 billion debt and worsening electricity blackouts drain confidence, limit loan demand and threaten rising impairments.
South African bank EPS estimates face downgrades as growth stalls
Rising policy rates and falling credit impairments — aided by the release of provisions built up during the pandemic — ensured South Africa’s leading banks received more EPS estimate upgrades than downgrades in 2021-22. Yet those have dried up this year, and our scenario analysis suggests cuts are likely in 2H. The scope for additional interest-rate hikes (currently 8.25%) or lower charges (below normalized levels for most lenders) is limited while economic conditions are deteriorating. That could drive a reversion to net downgrades.
Our basket comprises the leading six South African banks, assessing whether EPS estimates were raised or lowered each month, based on 12-month forward consensus. The net balance each month ranges from six (all upgrades) to minus six (all downgrades).
South Africa’s stalled growth weighs on banks’ lending prospects
A key drag on local banks, including FirstRand and Standard Bank, from the electricity crisis in South Africa is a collapse in business confidence and a sharp contraction in economic growth. Economists have slashed 2023 economic growth estimates to just 0.3%, down from an already weak 1.8% expected 12 months earlier. Combined with inflation of about 7%, that implies nominal GDP growth of 7-8% per annum. While banks are likely to be able to tread water with lending growth at about that level, uncertain conditions mean they are unlikely to deliver higher growth than that.
Longer-term opportunity exists for local lenders as corporates and households alike invest in renewable energy sources, but coal-based electricity generation is likely to remain the primary source near-term.
No quick fix for $23 billion of Eskom debt
The precarious financial position of South Africa’s near-monopolistic unprofitable state-owned electricity generator, Eskom — despite government debt relief — and escalating cases of so-called “load-shedding” (the local term for electricity blackouts), suggest there’s no quick fix. President Cyril Ramaphosa’s plan for the government to provide debt relief on two-thirds of the company’s 423 billion-rand debt ($23 billion) will ease pressure, but won’t resolve underlying problems of insufficient electricity-generation capacity, underfunded power plants and theft and corruption affecting electricity distribution.
Eskom’s debt is mainly in debt securities vs. bank loans, suggesting local lenders’ direct exposure is limited, even in the event of bondholders being required to take a haircut.
Electricity blackouts show no easing in severity
Load-shedding has plagued South African consumers and businesses for years. Yet diesel shortages and aging infrastructure mean both the occurrence and severity are deteriorating, reaching crisis levels in 2022, with this year set to be worse again. Eskom’s shortfall of electricity supply makes it necessary to ramp-up power cuts as it struggles to meet demand, inflicting damage on both economic growth and business confidence. New generation capacity and the improving performance of existing power stations is essential, but the financial need and time lag to deliver these aims are considerable.
The number of hours and days of load-shedding more than tripled last year, with more occurrences than the prior seven years combined. The severity was also greater, with more stage 5 and 6 incidents.
Lending growth unlikely to pick-up
Despite the challenging — and deteriorating — economic environment, lending growth has been resilient in South Africa to date, supporting the revenue outlook for local banks. Credit expansion has risen to about 8% annual growth, up from about 4% 18 months ago. Though that pickup is unlikely to push faster, and could even prove unsustainable. A weak housing market, low corporate confidence indicators and rising unemployment could combine to drive lending growth back to 5-8% lift or lower this year, which would imply barely any growth in real terms (compared with an inflation rate of about 7%).
Bloomberg
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