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Port Elizabeth - The problem with bad debt at African Bank Investment Limited [JSE:ABL] (Abil) has been on the front page of most newspapers – and only very serious financial news creeps from the inside pages to the front page to knock sport and scandal off for a day or two.
News24 and Fin24 have also been dominated by the Abil crisis.
The losses due to bad debt at Abil are well known by now. Management and the Reserve Bank came to a figure of around R17bn in bad debt compared to Abil’s total loan advances of around R60bn. If one takes into account that the average loan size of Abil’s customers is in the region of R13 000, the R17bn of bad debt translates into several million customers not repaying their loans.
Other banks have bad debts of several billion more. A quick tally by Fin24 shows SA banks have written off or made provisions to write off debt of more than R100bn over the last 12 months.
In the headlines:
- Warning over danger of reckless banks
- African Bank is open for business - curator
- Rescue plan for African Bank
In reality, there is very little distinction between writing off bad debt and making provisions for bad debt. When banks’ management decides that it is prudent to make a provision, they are fairly sure that the debt will not be collected and eventually it will have to be written off. There is simply no benefit in throwing more money on legal fees and such to try to squeeze blood from a stone.
Most banks follow a simple process: The bank will classify a loan as “non-performing” once a client is three or four months in arrears. The bank knows it is very difficult for any client to catch up missed payments and will take into account that a certain percentage of these non-performing loans will not be repaid.
After legal steps and exhausting other options – now a few months down the line, with more missed instalments – it is obvious that most of the debt amount will not be collected. It will be classified as bad debt and the bank will be responsible for writing it off. If some of the debt is repaid, for instance if assets are repossessed and sold, these recoveries are netted off against the balance of provisions for bad debt.
In the headlines:
- NCR faces flak over African Bank fiasco
- Regulators 'should have foreseen Abil woes'
- JSE rallies after Abil clean-up
All the banks’ financial statements show that these recoveries are quite small. Most people would agree with cynics when they say that the only beneficiaries of this process are lawyers, liquidators and curators.
Latest results from banks show how big the problem of bad debt really is. When Abil announced its interim results for the six months to March 2014, management said that credit impairment to advances (bad debt in relation to the total loan book) increased to more than 26% from around 13% a year earlier. (That was when investors who take time to read announcements started to sell their shares.)
Abil increased its provision for bad debt by more than R8bn to bring the total provision to R19.55bn. The total loan book was then R61.6bn. Provision was made against 80% of all the non-performing loans.
In rand terms, other banks made equally large provisions for bad debt that would eventually be written off. But, while the nominal amounts are also big, the bad debt relative to total advances is much smaller.
Standard Bank [JSE:SBK] is due to announce its results for the six months to June this week. Its annual results to December 2013 showed that Standard Bank increased provisions by a massive R9.2bn. Management said that a deterioration in credit quality within personal markets led to an increase in both non-performing loans and credit impairments. The increase in bad debt was blamed on credit card customers and instalment sales products.
In the headlines:
- Arrowhead reassures about African Bank impact
- Nene: Abil shows tightened financial control
- Nene: No system could stop African Bank failure
Absa, listed as Barclays Africa [JSE:BGA], indicated in their results for the year to December 2013 that the bank had to write off R5.88bn in bad debt (net of recoveries of R926m) in its financial year. In the previous year, the impairment losses amounted to R8bn.
First National Bank, part of the FirstRand Group [JSE:FSR], said in its latest annual report that non-performing loans increased to a total of R17bn at the end of its financial year to June 2013 after another R4.8bn were set aside for losses due to non-payment by debtors. A massive R5.3bn was finally written off during the year.
Nedbank [JSE:NED] said in its results for the year to December 2013 that an increase in losses associated with personal loans forced it to increase provisions by R5.6bn to a total R14.7bn. This R14.7bn of provisions is the amount of risky bad debt left after Nedbank has written off R5.9bn during the year.
Capitec Bank [JSE:CPT] showed an impairment expense of R3.98bn in their income statement for the year to end February 2014. This real expense included the write off of bad debt and provisions of R4.41bn less recoveries of R433m.
Management said that some R2.2bn worth of loans were in arrears, which equates to 6.5% of the total advances book. Overall provisions equal just less than 11% of all the outstanding loans.
In the headlines:
-Nene: Bank sector healthy, no sign of Abil impact
- No contagion risk from African Bank
The problem of bad debt is not limited to SA. It is interesting to note that Investec [JSE:INL] said in their latest results that their provisions for bad debt decreased in relation to their business in SA, but increased in Australia. In total, Investec’s provisions for bad debt totals R10.2bn (at an average exchange rate of R16.12 to the pound) at the end of March 2014.
The massive amounts of bad debt might increase even more due to higher interest rates, slow economic growth, high unemployment, higher fuel prices and increasing inflation.
-Fin24
