Debt: FNB, Standard suffer more

Johannesburg - FirstRand and to a lesser extent Standard Bank showed the highest growth in home loans at the height of the low credit cycle in 2005 and 2006.

Now they are lumped with the highest bad debts, according to a Citigroup research report.

Absa has the largest market share in mortgages, though this has declined since 2005 as FirstRand - through its subsidiary First National Bank (FNB) - and Standard Bank have gained ground.

Just as with subprime loans in the US, it was much cheaper for consumers to acquire houses because at the time interest rates were relatively low.

By mid-2006 Nedbank had also begun to grow its home loans strongly. It is feared that its worse bad debt position in the wake of this growth will evidence itself only in 2010.

The data in the Citigroup report show that Absa's home-loan market share stood at 31.7% at the end of December 2002. Nedbank came second with 27.4%, followed by Standard Bank with 20.2% and FirstRand with 16.1%.

The interest-rate-cut cycle speeded up from 2003 and by end-December 2006 the scenario was very different.

Absa's market share was still relatively stable at 31% and that of FirstRand at 16.5%. Standard Bank had dramatically improved its position to 25.7%, ostensibly at the expense of Nedbank, which had declined to 19.9%.

By the end of September this year Standard Bank had steadily gained ground to 27.2%, not far from Absa's current 29.9% market share. Nedbank had also grown strongly to 21%, but FirstRand had closed the taps. This banking group's market share had declined to 15.2% after having reached a high of 16.5% at the end-December 2005.

Citigroup ascribes this to FNB's stricter criteria, such as withdrawing home loans even after they had been granted.

FirstRand, in particular, had been aggressive in granting mortgages at the height of the cycle, says Citigroup. Nedbank started to increase its share somewhat later - but the cycle had already begun to turn.

Proven wrong

The first rate increase at the top of the cycle was in June 2006, with a standstill in the first half of 2007, when the prime rate paused at 12.5%.

FirstRand, Standard Bank and, even later, Nedbank apparently regarded the cycle as one in which no further rate increases would take place. They were proved wrong by the financial crisis that began to gain momentum in August 2007.

Now the banks are sitting with a rising pile of bad debt. According to data from Deutsche Securities, FirstRand was worst off in the year to end June 2008, with a bad debt ratio of 1.43% to mortgage advances. Standard Bank was not far behind at 1.34% and Nedbank at 0.90%.

Absa reflected a modest 0.72%. This is partially, says Citigroup, because Absa applies more extended criteria before a struggling home owner's loan is branded non-performing. This generally take six months compared to the other banks' three months.

Citi expects Absa's figure to rise to 1.29% this year and that of Standard Bank to 1.89%.

- Sake24