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Having flooded middle and upper income earners with credit ahead of the implementation of the National Credit Act (NCA) in June 2007, new data shows South African lenders have significantly grown their high margin unsecured lending books over the past year. The National Credit Regulator (NCR) is concerned lending practices will push those who can least afford it into an expensive debt trap.
For shareholders, the concern will centre on how effectively lenders will be able to manage the risk of those lending books in their apparent obsession to target the market so successfully tapped over the past decade by small rival Capitec Bank Holdings [JSE:CPI], which has developed specific expertise in developing the emerging market over recent years.
Lending to lower income earners has more than doubled since year-end 2007 as banks, seeking new clients, have targeted higher margin unsecured lending either through credit cards or through their growing cash loan businesses. Their aim: to lift returns in an environment of otherwise stagnant top line growth and rising cost pressures.
In December 2007 unsecured lending made up just 7% of the value of the R102bn in new credit written in the final quarter of that year. Mortgages then made up 50% of the total value of credit. Since then banks have cracked down on margin-crimping originators and have been pricing mortgages more aggressively in an attempt to drive their struggling mortgage divisions to profitability. But a combination of elevated house prices, less favourable mortgage rates and a stubbornly high household debt to disposable income ratio of around 77% means banks’ traditional client base is simply unable to afford to borrow. Mortgages now make up just 30% of their loan book. Growth is coming from elsewhere.
The NCR’s latest quarterly figures to end-March 2011 show consumers borrowed just R80bn – a whopping 20% less than that being lent at the start of 2008. However, what’s of concern is the unsecured portion of the book – R16bn, which is twice as big as it was three years ago. It now makes up 20% of total credit extension on a quarterly basis.
“Banks are very clearly veering away from mortgages and moving toward unsecured lending. The pricing there is more favourable to them and it drives up return on equity,” says David Danilowitz, an analyst at Nedbank Capital. “We need buyers to get some comfort in the property market again before we’ll see mortgage books grow. Meanwhile, banks have to write profitable business.”
And profitable it is – provided it’s managed properly. Before the NCA came into force, microlenders would typically lend amounts of up to R10 000 for no longer than 36 months. Now not only have the amounts grown, but payment terms have been extended. It’s not uncommon to see lenders provide up to R150 000 over a 72-month period. In terms of the NCA, lenders at current interest rates may charge a maximum of 32%/year (using the formula: Repo x 2,2 + 20%) to compensate them for the risk they’re taking giving unsecured loans.
“Lots of that money is going into consumption spending rather than value-adding investments in homes or improvements to existing properties,” says Rajeen Devpruth, manager for statistics at the NCR. It raises questions about the ability of borrowers to pay back that money and what impact it will have on bad debts over time, especially if the current growth trajectory continues.
NCR research (illustrated in the accompanying graphs) shows how lower income earners are far more dependent on high cost short-term unsecured loans than wealthier borrowers. The NCA chooses a figure of R15 000 to split lower and high income earners.
The freshest available data from the SA Reserve Bank’s BA 900 numbers show year-on-year total lending by SA’s big banks has been growing at just 2%/year. However, retail lending is quite strong, particularly unsecured lending – up a staggering 32% year-to-date – while mortgage growth remains stagnant at around 3%.
Of SA’s Big Four banks, Absa is shown to be most conservative in the retail lending sector, growing just 1% against an average 6%. It’s been particularly prudent in its mortgage book, which has seen a contraction versus positive 4% growth among the remaining three big banks. Absa has also slowed growth in personal lending from 17% in April to 11% in May.
By contrast, FirstRand has seen personal lending jump 21% – thanks to the rollout of its EasyPlan branch network, a direct response to Capitec – while card growth has been muted at 3% and mortgages climbed 5%.
Standard Bank has been the most aggressive in the mortgage sector, growing its book 6% and personal lending 15%, while its asset finance division appears to be struggling against Nedbank’s Motor Finance Corporation and dominant market player WesBank.
As Corporate South Africa becomes more cash flush amid a cross-industry clampdown on spending and more dependent on the bond market for large borrowings, lending into the corporate sphere has been fairly stagnant, with an average growth of just 1%.
For shareholders, the concern will centre on how effectively lenders will be able to manage the risk of those lending books in their apparent obsession to target the market so successfully tapped over the past decade by small rival Capitec Bank Holdings [JSE:CPI], which has developed specific expertise in developing the emerging market over recent years.
Lending to lower income earners has more than doubled since year-end 2007 as banks, seeking new clients, have targeted higher margin unsecured lending either through credit cards or through their growing cash loan businesses. Their aim: to lift returns in an environment of otherwise stagnant top line growth and rising cost pressures.
In December 2007 unsecured lending made up just 7% of the value of the R102bn in new credit written in the final quarter of that year. Mortgages then made up 50% of the total value of credit. Since then banks have cracked down on margin-crimping originators and have been pricing mortgages more aggressively in an attempt to drive their struggling mortgage divisions to profitability. But a combination of elevated house prices, less favourable mortgage rates and a stubbornly high household debt to disposable income ratio of around 77% means banks’ traditional client base is simply unable to afford to borrow. Mortgages now make up just 30% of their loan book. Growth is coming from elsewhere.
The NCR’s latest quarterly figures to end-March 2011 show consumers borrowed just R80bn – a whopping 20% less than that being lent at the start of 2008. However, what’s of concern is the unsecured portion of the book – R16bn, which is twice as big as it was three years ago. It now makes up 20% of total credit extension on a quarterly basis.
“Banks are very clearly veering away from mortgages and moving toward unsecured lending. The pricing there is more favourable to them and it drives up return on equity,” says David Danilowitz, an analyst at Nedbank Capital. “We need buyers to get some comfort in the property market again before we’ll see mortgage books grow. Meanwhile, banks have to write profitable business.”
And profitable it is – provided it’s managed properly. Before the NCA came into force, microlenders would typically lend amounts of up to R10 000 for no longer than 36 months. Now not only have the amounts grown, but payment terms have been extended. It’s not uncommon to see lenders provide up to R150 000 over a 72-month period. In terms of the NCA, lenders at current interest rates may charge a maximum of 32%/year (using the formula: Repo x 2,2 + 20%) to compensate them for the risk they’re taking giving unsecured loans.
“Lots of that money is going into consumption spending rather than value-adding investments in homes or improvements to existing properties,” says Rajeen Devpruth, manager for statistics at the NCR. It raises questions about the ability of borrowers to pay back that money and what impact it will have on bad debts over time, especially if the current growth trajectory continues.
NCR research (illustrated in the accompanying graphs) shows how lower income earners are far more dependent on high cost short-term unsecured loans than wealthier borrowers. The NCA chooses a figure of R15 000 to split lower and high income earners.
The freshest available data from the SA Reserve Bank’s BA 900 numbers show year-on-year total lending by SA’s big banks has been growing at just 2%/year. However, retail lending is quite strong, particularly unsecured lending – up a staggering 32% year-to-date – while mortgage growth remains stagnant at around 3%.
Of SA’s Big Four banks, Absa is shown to be most conservative in the retail lending sector, growing just 1% against an average 6%. It’s been particularly prudent in its mortgage book, which has seen a contraction versus positive 4% growth among the remaining three big banks. Absa has also slowed growth in personal lending from 17% in April to 11% in May.
By contrast, FirstRand has seen personal lending jump 21% – thanks to the rollout of its EasyPlan branch network, a direct response to Capitec – while card growth has been muted at 3% and mortgages climbed 5%.
Standard Bank has been the most aggressive in the mortgage sector, growing its book 6% and personal lending 15%, while its asset finance division appears to be struggling against Nedbank’s Motor Finance Corporation and dominant market player WesBank.
As Corporate South Africa becomes more cash flush amid a cross-industry clampdown on spending and more dependent on the bond market for large borrowings, lending into the corporate sphere has been fairly stagnant, with an average growth of just 1%.
