Johannesburg - Financial results from South Africa's largest four retail banks this month suggest the sector is facing a growing mountain of bad debts, particularly in home loans.
On Tuesday, FirstRand reported a loss of R975m in its home loans unit compared to a profit of R256m in the corresponding period of 2007. The loss was attributed to a R600m increase in funding and liquidity costs, and a R780m provision for bad debts.
The bank's CEO, Paul Harris, was particularly pessimistic about the outlook and warned of the threat posed by a second wave of job cuts on the South African economy.
Analysts said FirstRand results are significant because unlike the other banks, it was reporting its interim financial results for the six months ended December 2008.
The other banking groups, however, were reporting their full-year results. They included the first half of 2008, which was before the full impact of the subprime crisis.
Said FirstRand: "Retail bad debts have continued to rise sharply across all areas, but particularly in residential mortgages."
Cost and risk management, particularly in the home loans portfolio, was a big theme for all of the retail banks; moreover, it wasn't restricted to the big four.
For example Rob Shuter, who heads retail banking at Nedbank, warned bond originators that commissions were "going to fall". (There are a number of legal battles between the banking groups who are pushing to cut originator commissions as the market slumps.)
Bad debt rising
Here's a quick reminder about banks' bad debt figures:
Absa
For the full year, Absa grew its loans and advances book by 16.7% to R532bn. Non-performing loans (loans more than 90 days in arrears) as a percentage of total loans and advances at Absa rose to 3.5% from 1.7% in the previous year. The company saw a 140% rise in the impairment charge to R5.8bn.
Nedbank
Loans and advances across the group grew 16% to R434bn. Nedbank took a R4.8bn impairment charge, while the group's total credit loss ratio grew from 0.62% to 1.17%.
Standard Bank
Loans and advances rose 24% to R787bn for the year across the group. The credit loss ratio for the group worsened to 1.55% from 0.80%, and the group took an R11.3bn impairment charge for the year.
FirstRand
The bad debt charge has increased by more than 100% from December 2007 to R3.7bn, which the bank attributed to a "significant increase" in non-performing loans from R7.7bn to R18.6bn, equal to 4.2% of total advances.
Mike Brown, chief financial officer for Nedbank, said: "Impairments on home loan portfolios are expected to continue to increase into 2009."
Peter Wharton-Hood, who heads up personal and business banking for Standard Bank, said in a presentation that the secured lending environment "would remain under pressure", but he expected unsecured lending to "improve by year-end".
On Friday, ratings agency Moody's said prospects for the South African market were not promising. "With the rest of the economy in turmoil, prospects of a near-term recovery in the domestic housing market are bleak," it said.
House prices are expected to moderate in coming months, it said, while lower interest rates would provide some mortgage relief to homeowners.
"But highly indebted households will rein in expenditure. The wealth destruction caused by falling asset prices will also weigh heavily on households this year," it said.
* The writer holds preference and ordinary shares in Standard Bank.
- Fin24.com