Unsecured lending to hit banks further. THE unsecured lending storm that has battered African Bank and Capitec in recent months is far from over. Both microlenders should brace themselves for a “severe” bruising in the next few months, according to a banking report this week from rating agency Moody’s. Moody’s said in its report that local banks all face “further asset quality deterioration” and rising bad debts. This signals the gravest danger for investors in African Bank and Capitec, as both banks are likely to have to set aside more cash to cover for the bad debts. The banks are reaping the consequences of the unsecured lending glut in the last few years. South Africa’s unsecured loans grew by 30% between 2007 and March this year on a compound annual growth rate, compared with 6% for total consumer credit. In the past six years, such loans have quadrupled in size to R164.6bn, up from R40.9bn in 2007. But as the unsecured loan chickens have come home to roost, the carnage for African Bank has been extreme: its share price has plummeted 54%. Capitec’s stock has been more durable, slipping only 1%. The larger banks — Standard Bank, Nedbank, Absa and First National Bank — have largely avoided the carnage because they have “defensive” mechanisms that allow them to cushion the impact of the bad debts. This is because the big four banks offer a variety of products, not just unsecured loan offerings, so they can avoid a so-called “hard landing”. Investors should brace for more damage, according to Moody’s. The agency has tried, to some extent, to sugar-coat the warning by saying that African Bank and Capitec’s “capital buffer” and relatively sizeable profit margins on loans could help mitigate the effect of the fall in asset quality. But the agency is not as blunt as some analysts. First Avenue Asset Management’s head of financials and retail, Matthew Warren, for example, was unequivocal when he said, “it will be ugly”. African Bank’s response has been to stop granting many more such loans, thus trying to reduce its risk. CEO Leon Kirkinis knows these measures will continue to affect sales, but believes they will strengthen the quality of the loan book and sustain profitable growth in future. While the spectre of bad debt looms, the growth in new loans has masked this problem to some extent. Nevertheless, between 20% and 35% of new loans granted last year were done to “consolidate” existing debt, after borrowers fell on tough times. Moody’s warns that this may have delayed investors recognising “problematic borrowers”. As loan growth tapers off, however, the true nature of the poorer asset quality will emerge. Moody’s says it is now more difficult for banks to tighten up their lending standards, now that they’ve granted so many loans. More than a third of Capitec’s loans, for example, have been granted over more than five years. Mr Warren says Capitec will simply have to deal with its underwriting decisions. “If you are making 12-month to three-year loans, which is best practice globally, then you can more quickly improve the underwriting quality of your loan book by tightening up. This is because your book matures and rolls over more quickly, reflecting the recent tight underwriting standards more quickly.” But Capitec chief financial officer Andre du Plessis says the bank’s large capital buffers help it, as well as its “prudent liquidity management” and sound provisioning policy. Moody’s analyst Christos Theofilou warns that the banks’ asset quality will not improve soon, especially as they have doubled the size of average loans and extended the repayment time. The Reserve Bank’s recent figures show that unsecured lending has slowed down sharply, with only a 1.1% growth recorded on a month-on-month basis in April. Year-on-year growth has slowed to 27.9% — the slowest rate recorded since September 2010. Noah Capital Markets analyst Lisa Haakman said in a recent report that “it is evident that unsecured credit providers are increasingly nervous and have (tightened up their) credit-granting criteria dramatically”. Of the big banks, Ms Haakman said Nedbank was slow to react to the unsecured lending concerns, while Absa had been quick to turn off the taps. More than 95% of Absa’s personal loans were granted only to existing customers, while average loan sizes have shrunk. • This article was first published in Sunday Times: Business Times
Posted on: Mon, 15 Jul 2013 06:18:25 +0000
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