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SA’s secured loans will see only limited weakness – Moody’s

Cape Town - Despite South Africa’s subdued economic growth, high unemployment and overall weak consumer credit, the performance of secured loans is likely to hold up over the next 12 months, Moody's Investors Service said in a report on Friday.

Moody’s forecast real gross domestic product growth of 0.5% and 1.2% for 2017 and 2018 respectively.

“Any weakness in South Africa’s secured loan performance over the next 12 months is expected to be limited, given the strong lending criteria that are in place,” said the author of the report, Antonio Tena, a vice-president and a senior analyst at Moody’s. 

“Consequently, we expect only a moderate rise in mortgage-related non-performing loans, which is a view shared by most of the lenders that we recently surveyed.”

Securitisations backed by mortgages continue to benefit from low losses, Tena said. “In contrast, unsecured loan origination volumes have risen to levels not seen since 2013, mainly due to the wide availability of consumer credit, which has broadened out to the wider population, with on average, weaker credit profiles.”

Tena pointed to five key reasons for his assumptions:

1. Secured lending is supported by prudent underwriting criteria and in the mortgage market, reflected in the stronger borrower credit profiles and low loan-to-value ratios.

2. Existing securitised deals rated by Moody’s continue to benefit from low loan-to-value ratios. Most defaulted borrowers are encouraged to sell their own properties to maximise recoveries.

3. Consumer credit is being broadened out to the wider population. In the first quarter of 2017, there were 24.7 million credit-active consumers, up 1.6 million (6.9%) in two years. However, the average credit profile of consumers is weak, with 39.3% of them possessing impaired credit records, although this is still an improvement from a peak of 48% in 2013.

4. Growth in unsecured lending has resumed, which is indirectly negative for secured lending. Loan origination volumes have risen to levels not seen since 2013. Such growth has negative implications for unsecured credit performance.

5. Consumers encounter financial challenges in the current economic climate. Whether or not they obtain secured or unsecured lending, macroeconomic conditions remain a key obstacle. The country has been caught in a low growth trap since the global financial crisis, reflecting persistent structural bottlenecks, a key credit challenge.

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