The August collapse of African Bank Investments as its loans soured was only the beginning of South Africa’s bad-debt cycle.
The country’s four-biggest lenders are preparing for an increase in bad debts as the economy sputters and markets bet the central bank will keep raising interest rates after 75 basis points of increases since January.
A gauge showing the percentage of bank loans that might not be fully repaid rose to the highest level in at least four years, according to PricewaterhouseCoopers LLP research last month.
“Impairments in the unsecured portfolios have been increasing,” David Hodnett, Barclays Africa Group Ltd.’s chief financial officer, said in an e-mailed response to questions on October 1. While non-performing loans have declined in 2014, “we don’t expect the improvements of the current year to continue next year, because the consumers remain under pressure. We have increased our general provisions,” he said.
The nation’s unsecured lending market is being squeezed between growth at the weakest level since the 2009 recession and rising rates as inflation feeds off a 6.3% drop in the rand this year.
In the six months through June, banks recorded an average increase of 1.2% in non-performing loans compared with a year earlier, according to PwC’s local unit. The firm’s measure of loans by the four biggest banks that may not be repaid rose to 43.2% by end-June.
Standard Bank Group, Barclays Africa, FirstRand and Nedbank Group are vulnerable as customers buckling under higher borrowing costs struggle to repay debt, according to Neelash Hansjee, an analyst at Old Mutual Plc’s Cape Town- based investment unit.
Investors may be starting to notice, with the yield on FirstRand’s fixed-rate September 2016 bond rising 43 basis points since African Bank said on Aug. 6 it faced record losses and needed at least R8.5 billion to survive. That compares with an average 6 basis-point increase in the JPMorgan Chase & Co. CEMBI Financial Index.
“The pressure on consumers from higher transport, food and electricity prices and higher domestic interest rates, combined with subdued improvement in real incomes, is likely to persist for the remainder of 2014 and into 2015,” Simon Ridley, Standard Bank’s group financial director, said in an e-mailed response to questions yesterday.
“We are not anticipating a substantial spike in impairments. We have good information on our customers, which we are using to price appropriately for risk.”
While more than 40% of South Africa’s 53 million people have debt, 9.95 million have impaired credit records and the number of loans in arrears is rising faster the number of new ones being granted, according to the National Credit Regulator’s latest credit bureau monitor.
“The key danger is that interest rates increase by more than domestic conditions warrant once the U.S. starts tightening policy,” Nedbank Chief Executive Officer Mike Brown said in an e-mailed response to questions on October 1. “We have been concerned about the health of the consumer for a long time. The loans we have written are of high quality and the negative experience of the previous cycle is very unlikely to be repeated.”
In January, the Reserve Bank said it expected the economy to grow 2.8% this year. By September, in its latest reduction, it forecast expansion of 1.5% after the rand depreciated and strikes ate away at mining and manufacturing output.
The currency posted its 10th straight quarterly drop against the dollar in the three months through September. The rand was little changed against the dollar at 11.1857 as of 9 a.m. in Johannesburg.
“The banks have already started tightening and we expect lending to remain cautious especially in light of the African Bank curatorship,” Old Mutual’s Hansjee said. Any lessening of the pressure on consumers will be dependent on the interest rate cycle and is “at least two years away,” he said.
Investors have increased bets the South African Reserve Bank will raise rates, with forward-rate agreements starting in three months yesterday signaling another 20 basis points of increases this year, data compiled by Bloomberg show. The central bank’s last interest-rate meeting for the year is in November.
“The South African economy needs to focus on the drivers of growth, being policy certainty and competitiveness, to attract investment,” Nedbank’s Brown said. This “in turn will create jobs and improve the health of the consumer,” he said.
©2014 Bloomberg News