Special Report Podcast: Christoph Nieuwoudt - Chief Risk Officer, FNB
RYK VAN NIEKERK: It is Friday March 16 and in this special podcast we speak to Christoph Nieuwoudt of First National Bank about the risks associated with unsecured lending. Christoph, welcome to the show, all banks recently reported strong growth numbers for unsecured loans and it seems it will remain a focus area in the near term but the Registrar of Banks have launched an investigation to gauge the risk associated with unsecured loans, what is this investigation all about?
CHRISTOPH NIEUWOUDT: Ryk, yes thanks, nice to talk to you and hello to the listeners as well. The Reserve Bank is obviously very interested in what’s happening in unsecured loans and I think all the other regulators as well, the National Credit Regulator is also interested in this. I’m not sure it’s a formal investigation per say but we’ve obviously been asked a number of questions to give feedback to them at our next meetings. I think the main fear here is that there would be a bubble arising from the significant growth in unsecured lending. In our view, though, this is potentially not a credit bubble per say but really a shift from mortgage credit towards unsecured credit.
RYK VAN NIEKERK: Unsecured lending has experienced an explosion over the last few years, in some cases growing by more than 50% per annum. When does strong growth become a bubble?
CHRISTOPH NIEUWOUDT: I think it’s a very good question, it’s always a hard one to answer when you’re in the growth phase but I think what you have to look at is the overall level of indebtedness of the consumer and that is actually over the last, say, three years it was actually declined from, say, 82% debt-to-household income to around 75%. So overall the consumer is definitely not gearing up but where you’re exactly right is if you look at the lows of 2009 and the levels of new business production per quarter alerted from the NCR’s numbers about R50bn of credit production per quarter. That’s now increased to, let’s say, about R80bn per quarter and the most important thing there is the mix change. So where mortgages used to be the bulk of production in the past, mortgages have barely recovered from the lows of 2009, where, let’s say, personal loans has tripled in production from those levels. So we see it as a shift in the way that consumers are accessing credit and the way that lenders are providing credit. But the overall level of gearing hasn’t actually increased over that time.
RYK VAN NIEKERK: Several economists are forecasting that we may see higher interest rates in the not too distant future, how will this impact the risk profile of banks?
CHRISTOPH NIEUWOUDT: Again I think a very good question, the bulk of mortgage lending in the past and still today is variable rate. So on variable rate you you’re very exposed to the cycle if rates go up, the amount of repayment to the customer goes up significantly. The vast bulk of the unsecured lending however is fixed rate, so these same agreements won’t really go up. But I think your point is exactly valid that consumers are paying a lot more for credit today than they were pre the global financial crisis because they are, let’s say, forced to make…avail themselves of unsecured credit that yes, at significantly high rates than they would if they were borrowing on a secure basis.
RYK VAN NIEKERK: What is the difference? What is the average rate, if there is such a thing for unsecured lending?
CHRISTOPH NIEUWOUDT: Well, the NCA max at the moment is 32%, so at the lower end of the market probably a lot if the lending is at NCA max, obviously in the middle market the rates are lower but a typical margin on an unsecured loan could be 20% to 30% if you include non-interest revenue. While on a mortgage, let’s say a typical margin would be around 2%. So there is quite a big difference in the overall margin to the lenders.
RYK VAN NIEKERK: But First National Bank, as First National Bank, are you worried about what you’re seeing currently? Do you think we will move into a situation where the unsecured lending may become a problem for the whole risk profile of the bank?
CHRISTOPH NIEUWOUDT: Yes, of course, we see this in a serious light and this is one of the top topics from a credit perspective certainly. What we do look at we look at different segments of our customer base and we look at the level of gearing in those customers and, like I indicated, at this stage the level of overall gearing is not such an issue. If you look at the repayment-to-income basis, of course, that is still looking very good because, as you mentioned, the rates are at, let’s say, a 30 year low and yes that certainly would be the factors that we look at. So I would say we’re not concerned now but we do look at it very closely.
RYK VAN NIEKERK: Why are consumers changing from secured debt to unsecured debt?
CHRISTOPH NIEUWOUDT: Ryk, good question, I think this is driven both from the demand side, as you say, from consumers but also from the supply side in terms of what the banks and other lenders are approving. I think the reasons are multiple, firstly there’s the historical unprofitability of mortgage finance, if you look at the last five years banks hadn’t made money off mortgage finance, there’s increased funding cost due to structural constraints of accessing long-term funding and also new regulations like Basel III, which will impact this further. But there’s also the increased difficulty under longer delay and increased legal cost for banks to effect their security and that impacts the recover value that you can get. Another factor would also be the system has preferential access to debit orders that is enjoyed by smaller loans, which actually makes it harder for banks to collect on mortgage repayments and for customers to ensure repayment of their mortgages.
RYK VAN NIEKERK: Do you know what people actually used these unsecured loans for? Is it for capital, paying off of property bonds or is it on consumer products?
CHRISTOPH NIEUWOUDT: It’s hard to know exactly what they do do with it but the reasons that are typically stated, the prime reasons are, firstly, home improvement, followed by debt consolidation, then after that there’s a raft of reasons but would include things like education.
RYK VAN NIEKERK: Thank you that was Christoph Nieuwoudt, he’s the chief risk officer of First National Bank.