SA debt relief law ‘no cause for alarm’ for investors

Retailers have already made provision for the impact of the bill, BofAML analysts say.
The bill provides relief to over-indebted, lower-income consumers but worries investors that banks and retailers will suffer as a result of it. Picture: Shutterstock

A new South African law bringing relief to over-indebted, lower-income consumers is unlikely to deal as severe a blow to banks and retailers that some investors may fear, according to Bank of America Merrill Lynch analysts.

Read: Banks worried over new SA law giving clients debt relief

Describing the legislation as “a bogey, but no cause for alarm,” BofAML analysts including Michael Jacks said in a note that retailers have already provisioned for the projected impact on their bad debt. Banks would typically classify debt that qualifies under the new law under impairments, mitigating its effects. Legal challenges from creditors are likely, while the national credit body will need to add operating capacity, slowing its implementation.

Retailers with higher proportions of customers using credit may feel the effects in slower growth, with the targeted income groups accounting for an average of 40% of shoppers at the Foschini, Truworths, and Mr Price. A 5% debtors’ book write off would have a 2% negative earnings-per-share impact for Foschini and Truworths and 1% for Mr Price due to lost interest income, while damping future credit growth.

“Credit accounts for 70% of Truworths Africa sales, 45% at Foschini and 18% at Mr Price,” BofAML said, adding that “both Foschini and Truworths have already made provisions for this bill in their provisions for bad debts in their last set of results.”

Among banks, Capitec Bank has the highest exposure to the targeted income group and one-time impairments could erase 13% of EPS and 4.7% of recurring profits. However, Capitec management has “been actively reducing exposure to affected loans and note conservative provisioning relative to write-off experience, which should temper this outcome.”

Absa, the second-most exposed lender, could see a one-time blow to EPS of 9.8%, while FirstRand could lose 8.6%, Standard Bank 7.4% and Nedbank 6.5%. As unsecured loans account for just 8% of total unsecured advances by banks and only 1% of total bank advances, the law is likely to have a muted impact on South African economic growth, they said.

© 2019 Bloomberg L.P.

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The sectors not totally destroyed by the ANC government yet will soon be.

BofAML still has to learn the hard way how things work here. Does not help much when they talk things up they don’t know much about.

You want to tell me you “make provision” for something and that does not affect the bottom line?

I’m not too worried…we’ll happily cover this cost by way of increased bank transactional costs. (One group subsidizes the other. Not unique to SA, but in Mzansi it’s a fact of life. Come ride along.)

(Bank costs pales in comparison to Prescribed assets on retirement industry…yes, way more concerned re the latter)

End of comments.





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