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Banks fighting for unsecured lending market share

Market growing at almost 60% since NCA.

PRETORIA – The big banks in South Africa are fighting it out for market share in the rapidly growing unsecured credit market in the country.

With only Standard Bank (JSE:SBK) left to report on its annual results next week, it was clear in results news from Absa (JSE:ASA) at the beginning of the month, FirstRand (JSE:FSR) earlier this week and Nedbank (JSE:NED) on Wednesday, that most of the banks are looking for new business in offering advances and that this battle is being played out in the unsecured lending space.

According to the National Credit Regulator’s latest quarterly Consumer Credit Market report, unsecured credit granted is increasing year-on-year at 58.49% and credit facilities (which includes credit cards, store cards and bank overdrafts) growing even faster at 68.86%.

This while secured lending in mortgages extended only grew at 14.95% and other secured credit (including vehicle finance) at only 22.15%.

Graham Dempster, chief operating officer of the Nedbank Group (JSE:NED), told Moneyweb on Tuesday that the bank is definitely looking for business to offer advances.

“To unpack it in 2011 we offered R116bn in new loans. So for people who needed to borrow, the money was available,” he said.

Raisibe Morathi, Nedbank CFO, told Moneyweb that although Nedbank’s total loan book only grew by 4.4%, personal loans grew at about 37% in the year ending December 2011.

“This presents selective growth that we were advancing largely to our primary bank clients where we were looking at terms of around 40 months and an average loan size of R30 000. The other item that showed healthy growth was credit cards at 9.6%,” she said.

She indicated that Nedbank is focusing on achieving some portfolio tilt towards unsecured lending as the loan book was previously “more overweight towards secured lending”.

“Part of the tilt is the aim to balance it out with unsecured lending, which has a higher propensity for better margins,” Morathi indicated.

This was the story of the day at the results of FirstRand as well.

FirstRand also had a shift in the mix of its retail portfolio. The group indicated that their net interest income increased robustly as a result of advance growth, especially particularly strong growth in unsecured lending.

In FirstRand’s retail portfolio mix unsecured lending and credit card advances made up 6% and 4% respectively, but due to the higher margins linked to these types of credit products, generated 29% and 11% of retail net interest income.

This while residential mortgages, making up 61% of retail gross advances, only contributes 23% of net interest income.

A lot of the new advances in the unsecured space for FirstRand’s franchise FNB were done in their mass customer segment, representing clients earning less than R100 000 per annum.

In the results, the group stated that the mass segment performance reflects strong growth in net interest income due to an increase in advances, “particularly in the unsecured space, where new business is written at higher margins”.

In this segment total unsecured advances for FNB now stands at R56bn. Total advances for this segment grew at 38% for the period reported on in comparison to the previous year.

Even Absa, who reported a shrinking loan book, indicated in their results that it was increasingly focusing on higher-return unsecured.

Where Absa’s retail banking loan book shrunk 2% year-on-year, credit card advances grew 4% and personal loans 7%.

According to Dempster, South Africa has a very dynamic changing demographic profile of people in employment. He told Moneyweb there are a lot more participants in the labour market with secure jobs where they can prove that they have been in formal employment for some time.

“These individuals are formally employed and have a predictable set of cash flows so that they can afford to pay for things like education and for example, white goods,” he said.

It is this segment of the market where it has become clear that unsecured loans make up an attractive proposition for banks, “provided that you apply the right fundamental risk criteria to the disbursement of the loan,” he said.

One of the smaller banks in South Africa which has been extremely aggressive in the unsecured market, Capitec, predicted that the bigger players in the market will be entering the market looking for market share.

At the announcement of its interim results in September last year, Riaan Stassen, Capitec CEO, said that the growth in unsecured lending was what Capitec expected after the implementation of the National Credit Act.

Stassen said that the Act formalised the industry and attracted the “four traditional banks” into the unsecured segment of the market.

In graphs made available by Absa when reporting on its results, it is clear that the four major players – Absa, Standard Bank, Nedbank and FirstRand – still remain strong with regards to market share in mortgages and instalment credit.

Only 7.4% of the market share for total mortgages extended was not held by these four banks and only 1.5% of instalment credit agreements.

In the category of overdrafts and other loans, the category where a bank such as Capitec comes into play, the market share held by other players jump to 21%.


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