Tuesday, September 23, 2008

Banks prepare for onslaught

Cash-strapped consumers have put the country's financial institutions on high alert with the top four banks increasing their provision for bad debts in anticipation of more people defaulting on home loans and car repayments because of higher interest rates and rising inflation.

The country's four largest banks - Absa, First National Bank, Nedbank and Standard Bank - confirmed they were preparing for an increase in bad debts and doing all they could to ensure clients' properties and cars were not repossessed until all avenues had been explored.

Standard Bank's bad-debt provision stands at R1,5-billion, while Absa's is at R975-million and Nedbank R500-million. First National Bank Bank confirmed consumers were struggling to cope, but would not divulge its bad-debt provision because it is due to release its annual report shortly. The debt provisions are banks forecasts of future debt defaults.

Customers have been battling since interest rates, which stood at 10,5 percent in June 2006, began rising by 500 basis points to 15,5 percent in June 2008. The Ernst & Young Bank index said in July that banks were feeling the strain because of the increase in bad debt provisions, with all banks indicating that their provisions have increased in the past year.

"To some extent the provisions are leading actual bad debt increases, indicating that banks are anticipating bad debts will continue to rise in the face of rising interest rates," the report said.

Emilio Pera, the lead banking director at Ernst & Young, said retail banks were feeling the effects of rising interest rates and rising inflation. "High and rising interest rates have reduced the demand for credit, while simultaneously causing bad debts and provisions to increase. Rising inflation leaves lower levels of discretionary income with which to service existing debt. This double knock results in revenue growth pressures, at the same time that expenses are generally pressured upwards through increasing bad debt costs," he said.

Gavin Opperman of Absa said provision for bad debts had gone up because consumers were battling to cope with rising interest rates. "The total consumer debt and most importantly household expenditure has increased at a far greater rate than income," he said.

Opperman said the situation was worsened because house-price growth was less than 4 percent, while the prime interest rate stood at 15,5 percent. Two years ago the interest rate was 10,5 percent against a house-price growth of almost 20 percent.

Nominal house-price growth was down to a level of only 1,7 percent year-on-year in August - the lowest growth rate recorded since January 1993. This has increased the risk of nominal year-on-year price growth dipping below zero. In real terms, house prices were down by 9,6 percent year on year in July this year, which was the biggest real price decline since late 1992.

"House-price growth does not give cash flow but it does build equity from which customers can raise cheap funding to acquire assets and meet certain living expenses, for example education," he said.

"If we look at why the consumer is stressed at the moment, it is not just the interest rates, but the fact that it has been prolonged from June 2006 to June 2008. Over a two-year period, consumers have seen a 36 percent increase in repayments on home loans," he said.

"Only next year do we expect to see a reduction, and many people did not expect this to happen,"he said.

Opperman said South Africa experienced rough economic cycles in 1985 after PW Botha's Rubicon speech and in 1997-1998 when interest rates peaked at 23 percent, but the cycle did not last longer than six months. "This cycle is definitely further-reaching than those cycles," he said.

Compounding the problems, Opperman said the country was confronted by a triple whammy of economic, social and political problems for the first time. "It is the first time we have all three challenges - a changing government, the recent social problem posed by the xenophobic attacks and the impact of global financial events on our economy," he said.

Tony Twine, the senior researcher and director of Econometrix, said consumers went "ballistic" during the boom in the four years before rates began rising in 2006 and had it not been for the National Credit Act peoples' financial circumstances would have been much worse. "The NCA has certainly prevented weaker borrowers from over-extending themselves," he said.

Rajesh Devpruth, a researcher with the National Credit Regulator, said the credit laws make provision for total disclosure so consumers know upfront what they were going to fork out for items on credit.

He said the regulator was unable to say whether the recent high interest-rate cycle had led to a drop in credit granting, but statistics from individual banks reflected that the number of applications had come down.

Financial institutions were also feeling the pinch as the new vehicle sales in South Africa last month dropped by more than 30 percent compared to the same month in 2007, according to the National Association of Automobile Manufacturers of South Africa (Naamsa).

Johan van Zyl, the Toyota chief executive, said the passenger vehicle sector was one of those most affected by global credit issues, with corporate and private buyers forced to evaluate purchasing decisions carefully.

Naamsa said local new-vehicle sales are likely to remain under pressure for the rest of the year because of the cumulative effect of higher lending rates, personal debt and lower economic activity.

Marcel de Klerk, the managing executive of vehicle and asset finance at Absa, said the motor industry was facing another 18 months of hardship.

"Customers are not going to be even close to being able to afford vehicles. If one considers next year, we see the industry falling between 5 and 8 percent. Interest rates have peaked but the debt levels of customers means that even after the economy has turned, we will see delay before there is any growth," he said.

Absa was averaging about 1 350 vehicle repossessions since the beginning of the year - up from last year's average of 1 000 a month. "We encourage customers finding it hard to pay to contact us because the last thing we want to do is repossess the vehicle," said De Klerk.

"We look at the equity in the vehicle, the payment history and try to normalise the account because both the bank and the customer lose at an auction.

"The price one fetches at an auction is 15 percent lower than last year so the client still sits with debt not recovered from the auction."

2 Opinion(s):

Edie said...

Keep up the good work.

Anonymous said...

For those of you that are considering emigration. Remember your credit rating means shit in any other country. So take what you can. These banks were built on the back breaking sweat of our honest forefathers and they now hand out BEE shares like candy. Make sure you get your part of the pie before you leave.