This analysis is by Bloomberg Intelligence Senior Analyst Philip Richards and Senior Associate Analyst Lea El-Hage. It first appeared on Bloomberg Terminal.
South African banks’ two-year consensus EPS growth, based on one-year estimates, could turn negative in 2H as economic conditions worsen and inflation fades. Eskom’s $23 billion electricity generator debt and power outages are piling up, reducing interest rates and threatening power hikes.
South African banks’ EPS is estimated to be facing a slowdown in economic growth
The increase in prices and the deterioration of loans – supported by the release of assets established during the pandemic – have ensured that the leading banks in South Africa will receive an increase in EPS rather than a decrease in 2021-2022. However this has dried up this year, and our analysis shows that a cut is possible in 2H. Increases in additional interest (currently 8.25%) or lower fees (affordable to most borrowers) are rare as the financial crisis worsens. It may cause changes in Net downgrades.
Our basket contains six leading banks in South Africa, assessing whether the EPS estimate was raised or lowered every month, based on the consensus of 12 months. The total income each month ranges from six (total increase) to six (total decrease).
Stalled growth in South Africa is limiting bank lending opportunities
The biggest drag on local banks, including FirstRand and Standard Bank, from South Africa’s power crisis is a collapse in business confidence and a sharp drop in economic growth. Economists have cut economic growth for 2023 to just 0.3%, down from the already weak 1.8% forecast 12 months ago. Combined with inflation of about 7%, that means GDP growth of 7-8% per year. Although banks can tread water with loan growth at the same level, uncertainty means they cannot deliver much higher growth than that.
Long-term opportunities exist for local lenders as companies and households invest in renewable energy, but coal-fired power generation is likely to be the starting point in the near term.
There is no quick fix for Eskom’s $23 billion debt
The difficult financial situation of the state-owned electricity company Eskom, which is very close to the South African government, Eskom – despite the government’s debt relief – and the number of so-called “load-shedding” (the local term for power outages), he shows that there is no quick way. President Cyril Ramaphosa’s plan to offer debt relief on two-thirds of the company’s $423 billion ($23 billion) debt will ease the crisis, but it will not solve the problems caused by inadequate electricity generation, inadequate power plants and theft. and corruption related to electricity distribution.
Eskom’s debt is mostly debt versus bank loans, meaning direct exposure to local lenders is limited, even if the bonds need a haircut.
The power outages do not indicate a serious slowdown
Dumping has plagued South African consumers and businesses for years. However, the lack of diesel and aging infrastructure means that the situation and problems are increasing, reaching a crisis in 2022, while this year will also be difficult. Eskom’s power shortages make it necessary to turn off electricity as it struggles to meet demand, which is hurting economic growth and business confidence. Increasing the number of power plants is important, but the financial need and delays in achieving these goals are high.
The number of hours and days of flooding tripled last year, with more incidents than in the previous seven years combined. The risk was also high, with many cases of 5 and 6.
Loan growth is unlikely
Despite the difficult economic climate – and worsening, credit growth has been strong in South Africa to date, supporting local bank earnings. Loan growth has risen to around 8% annually, up from 4% 18 months ago. Although the drawing can’t push fast, and it can be unstable. A weak housing market, weak corporate indicators and rising unemployment may combine to drive credit growth back to 5-8% higher or lower this year, which may not mean any real growth (compared to an inflation rate of around 7%).