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Gloom Grips S. Africa Growth

South Africa slumped into a recession in the first quarter after all but two industries shrank amid continued political wrangling and policy uncertainty
Banks’ income from fees on transactions and commissions and deposits dropped 14%, while costs increased faster than revenue.
Banks’ income from fees on transactions and commissions and deposits dropped 14%, while costs increased faster than revenue.

Barclays Africa Group just delivered further evidence that South Africa’s economy won’t be climbing out of the doldrums anytime soon.

The Johannesburg-based lender kicked off the earnings reporting season for South Africa’s banks with a decline in total first-half income, the first interim contraction since Maria Ramos took over as chief executive officer in 2009, Bloomberg reported.

The stock dropped on Friday leading declines on the six-member FTSE/JSE Africa Banks Index and extending its losses this year to 14%.

The strain of South Africa’s economic contraction also showed in the 10% decrease in earnings excluding one-time items at the bank’s main South African consumer unit in the six months through June as lending at its mortgage and credit card businesses shrank. Income from fees on transactions and commissions and deposits dropped 14%, while costs increased faster than revenue.

“We expect the economic environment to remain challenging,” Ramos said in an emailed statement. The company also sketched a bleak outlook for the rest of year across its businesses in 12 African countries, predicting “low- to middle-single digit loan growth,” a decline in its net-interest margin, slower revenue growth and higher costs.

Policy Uncertainty

South Africa slumped into a recession in the first quarter after all but two industries shrank amid continued political wrangling and policy uncertainty. Barclays Africa’s South African banking operations account for 74% of normalized earnings before one-time items.

The country’s foreign-currency debt was downgraded to junk in April after President Jacob Zuma fired his respected finance minister and replaced him with someone who has no financial experience. Unemployment is also at a 14-year high as the governing African National Congress prepares to pick a new party president at the end of the year. Unemployment is at a record high of almost 28%.

“Key risks facing South Africa in the second half include heightened political and policy uncertainty in the run up to the ruling party’s December elective conference, the potential for the country’s sovereign credit rating to be downgraded further, and for weak business and consumer confidence to lead to a longer, more protracted recession,” Barclays Africa said.

Its Johannesburg-based peer, Nedbank Group, reports first-half earnings on Monday.

Slightly Negative

“The main risk to our view on Nedbank and on South African banks in general remains the political and economic situation in South Africa,” Henry Hall, a banks analyst at HSBC Holdings Plc in Johannesburg, said in a note on Friday. The lender, controlled by London-based Old Mutual, will report 2% growth in earnings per share before one-time items, Hall said.

A 25 basis-point reduction in interest rates last week will also be “slightly negative” for South African banks, Harry Botha, an analyst at Avior Capital Markets, said in a note. Barclays Africa hedges most of its short-term interest rate exposure so it’s probably in the best position followed by Standard Bank Group, he said.

A 27% improvement in impairments following credit losses from two large corporate clients the previous year and 19% growth in profit from its African businesses helped boost earnings. The lender reported a 7% increase in normalized EPS excluding one-time items to 9.18 rand, beating the 8.80 rand median estimate of four analysts.

“For the remainder of the year, Barclays Africa will place priority focus on its retail and business bank performance in South Africa and on driving opportunities in its businesses outside of South Africa,” the lender said.

A Likely Bounce-Back

The South African Reserve Bank said economic growth is likely to recover in the second quarter. These figures are due for release in September, enca reported.

Governor Lesetja Kganyago was addressing the South Africa Reserve Bank’s annual general meeting when he said the country’s sluggish economy has turned the corner. "We believe that the worst is behind us and that growth in the second quarter of this year will be positive," said Kganyago.

But the bank predicts the economy will grow by 0.5% this year and by 1.5% in the next two years.

Last week the bank slashed its key interest rate for the first time in five years, following better than expected inflation figures.

 

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