South Africa: Unsecured credit boom raises concern
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South Africa: Unsecured credit boom raises concern

Banks post strong income growth; Mass-market loans boost retail profits

The latest publicity campaign from South Africa’s National Credit Regulator (NCR) warns: "Do not borrow money you do not need. Spend wisely, borrow wisely, ungalahli." The slogan ends on a Zulu word meaning do not be wasteful and be careful. Investors in South African banks should take heed too.

The big four banks in South Africa, which account for around 85% of total assets, impressed with better-than-expected 2011 profits last month. They all saw more than 20% growth in headline earnings, the country’s main measure of earnings – which excludes various one-off items. Return on equity rose, with ratios of between 14.3% at Standard Bankto 19.5% at FirstRand.

Lower impairment charges, including from mortgages, were a key factor, as South Africa continued to recover from a recession after the collapse of Lehman Brothers. Credit impairment charges at Standard Bank, South Africa’s biggest lender, dropped 13%. Its bad debt shrank to 4.1% compared with 5.78% a year before.

Headcount cuts

For some, staff cuts have helped keep costs under control too: Standard Bank’s headcount dropped by 4% in 2011 – the final part of a 2010 corporate restructuring.

However, in 2012 and 2013, banks might be less able to rely on lower bad-debt charges and staff cuts as a means to boost growth. Now there are worries that profitability is becoming unduly dependent on a relatively new area of growth: short-term loans to the previously underserved, lower-income segments in retail.

Retail lending – including unsecured advances to those not sufficiently wealthy to provide collateral in the form of a house or car – was the main driver behind higher earnings at FirstRand, the second-biggest bank, last year.

Similarly, headline earnings in personal and business banking rose 40% at Standard Bank. The retail unit at Nedbank, the fourth-biggest lender, increased headline earnings by 163%.

With economic growth rising to just over 3% last year, banks have been able to charge secured borrowers higher margins. But although in some cases mortgage lending increased, unsecured credit is rising much faster. By the end of the third quarter of last year, according to figures from the NCR and quoted by Bloomberg, unsecured loans were up more than 45% from the previous year.

Unsecured small loans

Frequently aimed at junior civil servants, the typical unsecured loans are about R10,000 – around a month’s salary – with a repayment schedule of between six and 18 months. Retail specialists Capitec and African Bank started the trend, after they were established 10 years ago – often nabbing loans businesses from low-end retailers, particularly of furniture.

African Bank and above all Capitec have seen by far the biggest growth in unsecured lending during the past five years: 219% and 656%, respectively, according to Johann Scholtz, at Afrifocus Securities in Cape Town.

Nevertheless, bigger banks are now following their lead. Unsecured loans, excluding credit cards, at FirstRand and Nedbank have risen by almost 60% since 2008.

"Some banks have made money from this sector and the [bigger] banks want a share of it," says Jana Kershaw, credit analyst at Rand Merchant Bank. Indeed, FirstRand CEO Sizwe Nxasana told Euromoney last year he was opening eight cut-price branches a month in low-income districts of South Africa as part of a strategy to target previously untapped consumers.

The Registrar of Banks, South Africa’s regulator, said last month it was launching an inquiry into unsecured lending at the big banks in South Africa. One problem, says Scholtz, is that as the central bank has kept rates on hold, loan sizes and maturities in the unsecured segment have been creeping up to as much as R250,000, repaid over seven years.

Rising risks

Sometimes, says Scholtz, banks have been providing more unsecured credit to those on higher incomes but with insufficient equity to meet the requisite loan-to-value ratios on larger purchases. Furthermore, unsecured lending might be contributing to a larger portion of banks’ net interest margin than their proportion of the loan book – just 8% – might suggest.

"If the boom [in unsecured lending] ends, it could be a big hit on profits," says Scholtz. Most at risk, he says, will be those banks that have given more unsecured loans to customers whose primary bank account is at a different firm, and whose credit risk is therefore more difficult to predict.

Part of the motivation has been to win over new customers and the attendant transaction fees. But interest rates on these unsecured loans can be as high as 40%. South African banks suffer more from shortages of liquidity than capital constraints, so it is also a means to boost return on equity in retail without tying up cash in mortgages.

Some gain comfort that South African household debt-to-disposable income is falling – from 78% to 75% in 2011, according to Standard Bank. "I don’t think it is a bubble," says Richard Ladbrook at Absa Capital. "These loans are becoming more affordable."

Nevertheless, the official unemployment rate in South Africa is about 25%. The savings ratio as a proportion of household income remains next to zero, and with rising consumer demand – potentially resulting in higher inflation – the Reserve Bank’s public statements are becoming more hawkish.

Unsecured exposure
Exposure to unsecured credit to households ex credit cards
Absa FirstRand Nedbank Standard Bank Abil Capitec
Unsecured credit book (billion rand)
Jan 2008 26 15 13 21 12 2
Oct 2011 28 23 20 28 38 16
Percentage of total loans and advances
Jan 2008 5.1 3.4 3.5 4.1 86.2 92.0
Oct 2011 5.2 4.8 4.2 4.4 80.4 85.6
Source: SARB BA900, Afrifocus
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