Answering a question from a jittery shareholder at Nedbank's AGM in May, CEO Tom Boardman was blunt: "There's no question that we'll go into a recession, if we're not in one already."

But he also said: "I'd rather be running a bank in SA than in most countries in the world."

This was confirmed in May, when SA slipped into its first recession in 17 years. But for a bank, this is a rough realisation: for Nedbank, for example, one of the many implications of a recession is that it manifests itself in mining projects being cancelled, small businesses defaulting on their overdrafts, jobs being lost and customers defaulting on home loans and credit cards.

For FirstRand (the biggest asset financier), it means people defaulting on vehicle loans, and at SA's largest mortgage financier Absa, it means people struggling to pay their home loans.

It's not pretty, and it has led to billions being set aside already for bad debts. Factor in a global banking crisis that has forced the world's top banks to write off a gargantuan US$3 trillion for bad assets since 2007, and you'd expect some really miserable numbers from local banks.

And yet, what remains remarkable is that SA's top four banks made R62bn in profit in 2008, down only 3,2% from the R64,1bn that they made in 2007 combined. Of this, Standard Bank again headed the pack with R22,8bn in pretax profit (a marginal 5% fall), while Absa's profit actually grew 8% to R15,2bn and Nedbank's gained 1% to R8,8bn. FirstRand sustained a 12% drop in pretax profit to R15,2bn. But as an entrepreneurial bank that specialises in investment banking, FirstRand is likely to make a big comeback.

And if anything, smaller banks such as Capitec and African Bank are doing even better than they did last year, with loan growth still exceeding 40%, and earnings also growing.

When asked in May how long this could continue, African Bank boss Leon Kirkinis said the growth would be moderated only by the desire of the bankers. "I'm not a big believer in that markets get saturated. I think management brains get saturated, not markets."

The bank you'd expect to be bruised the most is Investec, the investment-cum-private bank listed in both London and Johannesburg, with a keen spirit of adventure for dabbling in the capital markets. And Investec's profits for the year to March were 32% lower than the previous year.

But, as CEO Stephen Koseff says, given what's happening in the global environment, a R5,1bn (£ 386m) profit is a healthy number. He says it is "not a season to worry too much about earnings", but rather about the strength of the balance sheet, and whether your bank has enough liquidity. "It's probably been the most difficult period for financial services in our lifetimes. I hope we don't see it again and my grandchildren don't see it again [either]."

As a consequence of the upheaval, banks have had to seriously rethink their expectations, both in terms of profit and responsibilities.

An Economist report spelt out how the days of mega-returns for shareholders have vanished for now. Rather, the pressure is on banks to fulfil their public role of lubricating the economy and settling for lower profit in the process. "The extraordinary returns on equity that banks enjoyed in recent years were largely created by leverage, the ability to increase the amount of assets they held relative to their equity, and by asset velocity', which let banks reuse capital multiple times during the course of a year," it said.

But the new emphasis is on "stability of capital and funding", so leverage isn't available to the extent it was and regulators want banks to keep their capital steadier.

So whereas European banks had return-on-equity ratios of close to 25% between 2005 and 2007, the current level of around 15% is more likely to prevail for the next few years.

SA banks are facing a similar shift. Last year, the return-on-equity ratios for all SA's banks dropped: Standard Bank's fell to 18,2% and Nedbank's to 17,7%. Absa remained relatively high at 23,4%, as did FirstRand (21,5%), but this was some fall from 27,2% and 28,1% respectively.

Does this mean that we're entering a period in which shareholders can expect an RoE ratio of around 15%? Patrice Rassou, a banks analyst at Sanlam Investment Management, doesn't think so. "Nobody is expecting losses from the banks, just lower profits, and the bad debts are working through the system. So you could argue that bank shares could still rise considerably in the next three years."

But this downward trajectory has given investors a pause, as they fear that bank profits may permanently ebb to a low level. This is reflected in their JSE performance.

Since their peak in 2007, Standard Bank has lost 28% of its value, Absa has shed 30%, FirstRand has lost 48% and Nedbank has diminished by 42%. As you'd expect for an investment bank, Investec had a far tougher time as its stock has fallen 60% from more than R100 to around R42/share.

This is why the Top Companies ranking system - which rates companies according to the internal rate of return incorporating their share price - has been a harsh judge for banks in the past 18 months.

Until last year, banks were flying. For example, fledgling microlender-turned-bank Capitec was eighth in last year's rankings. But in line with plummeting share prices of global banks, and concerns about the steep rise in bad debts, bank stocks have taken a thrashing. So Capitec's share price fell from R41/share to R29/share in 2008, which contributed to its steep fall in the Top Companies ranking to 38th on the list this year.

Capitec has since retraced to R38/share in line with other banks, which suggests that 2009 could be a much better time for banks.

But the Top Companies ratings show that the best bet over the past five years for investors has been the smaller banks. On the rankings, Capitec has the best internal rate of return over five years at 46%, with its pretax profit growth over that period being 157%.

African Bank, with a 36%/year internal rate of return for five years, has been almost as solid and is 61st on the list of all JSE firms. Its pretax profit growth was 58%.

The big banks are some distance behind. Absa - at 106th on the list - is the best of the big four with an internal rate of return of 26%/year and average EPS growth per year of 36%. Standard Bank, FirstRand and then Nedbank trail.

But as banks emerge from the worst period in the past few decades, there'll be a new guard at the helm of most of SA's top banks.

At Nedbank, Boardman will be replaced from next year by financial director Mike Brown. At the bank's AGM in May, Boardman told shareholders it was his last at the helm. His tenure has coincided with Nedbank's recovery, even if it couldn't exactly be described as a resurgence.

"Six years ago when I stood up here at my first AGM, the bank had made a R1,6bn attributable loss. The bank has come a long way since. We have arrested the market share slide and improved staff morale," he said.

Ex-Transnet boss Maria Ramos has already taken up Steve Booysen's seat, and FirstRand CEO Paul Harris will leave at the end of this year, and will in all probability be replaced by Sizwe Nxasana.

Of the big four, only Jacko Maree remains firmly entrenched at Standard Bank, though there are three apparent successors in Sim Tshabalala, Peter Wharton-Hood and Ben Kruger.

With bad debts in home loans still to emerge, the prognosis for banks this year isn't smashing, but there are signs of improvement. Last month, Koseff said that banks had "passed through the worst".

The issue for banks in the coming months is how to keep a lid on bad debts, especially in the home loan divisions, where some analysts have suggested there could be a looming impairments crunch.

Already, in 2009 there's been a dramatic spike in bad debts. For the first three months of 2008, Nedbank's impairments for bad debts amounted to R800m, and for the same period this year this more than doubled to R1,8bn. Absa too has warned about rising impairments.

But there is a glimmer of hope. As Boardman says, "the situation is deteriorating, but the rate at which the arrears are growing is slowing".

This steep deterioration is probably why banks aren't lending as much as they did last year. Though credit growth in 2008 was an adequate 12%, banks have ratcheted up their lending criteria significantly. Whereas in 2006, home loans equal to 108% of a house's value were commonplace, now, most banks are asking for at least a 10% deposit - if they'll lend at all.

But the fact that SA's banks are still profitable says much about their fortitude. As Boardman says: "If ever risk management has been put to the test, it's been in the past 18 months."

Bloodied but standing, SA banks have come through the examination.