Banks will have to put greater focus on collections as consumer pressures continue

With the news that the repo rate will remain at 8.25% until May, based on inflation for February 2024 coming in higher than anticipated — hopes of a rate cut any time soon are rapidly dwindling.

South African Reserve Bank (Sarb) governor Lesetja Kganyago has made it clear that the bank won’t change policy until inflation is sustainably at 4.5%, with expectations now that it will slow down and average 5.1% this year and 4.6% in 2025, a 0.1 percentage point nudge up from last month’s forecast for this year. Earlier this week, the governor pointed to food prices, geopolitical risks and their impact on global supply chains and energy markets as some of the upside risks to the inflation outlook.

Economists now foresee the first 25 basis points cut to 8.00% only in the second half of the year, on the back of a rise in annual consumer inflation to 5.6% in February, from 5.3% in January and 5.1% in December, as reported by Stats SA. South Africa’s repo rate is expected to fall to 7.5% in November, loosely translating to three consecutive cuts in meetings from July to the end of the year.

Neil Roets, chief executive of Debt Rescue, warns that a worrying trend has developed where consumers are turning to credit to purchase groceries at larger supermarkets. “We continue to see consumers turning to credit to put food on the table, in the form of store cards, credit cards and payday loans. This sets a dangerous precedent among consumers who are already battling to fulfil their debt obligations,” he warns.

Read more in Daily Maverick: Cost of living crisis pushes cash-strapped consumers deeper into debt trap

Middle-class South Africans now spend an estimated 73% of their earned income servicing debts and other fixed-cost expenses — leaving just 20% of their earnings to buy food, medicine, petrol and transport along with other daily necessities.

Increased risk for banks 

Costa Natsas, PwC Africa financial services leader, in a PwC banking sector analysis points out that this combination of events has increased the cost of risk — particularly in home loans, vehicle and asset finance and personal loan portfolios. South Africa’s prime rate of 11.75% at 31 December 2023 was 125bps higher than at 31 December 2022 and 475 bps above the bottom of the rate cycle from mid-2020 to late 2021.

The combined credit loss ratio (the income statement impairment charge divided by average advances) for the big four banks (Standard Bank, First Rand, Absa and Nedbank) increased to the top end of their through-the-cycle ranges at 102bps as their combined income statement credit risk charge increased 26.6% from R42.5-billion in the 2022 financial year to R53.8-billion in the 2023 financial year. Total non-performing loans increased 21%, comprising 5.4% of gross loans and advances. A bank’s credit loss ratio measures the amount of credit losses it experiences relative to its total credit exposure. It's an essential metric because it provides insight into the overall quality of the bank’s loan portfolio and the likelihood of default by borrowers.

Standard Bank: ‘clients likely to remain constrained’

Standard Bank reported an increase of 22% in credit impairment charges to R16.3-billion. The increase in charges was driven by new loan origination, client strain driving partial payments, negative sovereign risk migration, and new defaults. In South Africa, credit impairment charges increased across all portfolios, compounded by the non-recurrence of credit recoveries on the payment holiday portfolio in the 2022 financial year (R500-million). Standard Bank’s credit loss ratio increased from 83 basis points in the 2022 financial year to 98 basis points in the last year, at the top of the group’s through-the-cycle credit loss ratio target range of 70 to 100 basis points.

Chief executive, Sim Tshabalala says clients are likely to remain constrained until interest rates start to decline. Credit impairment charges are expected to peak in the first six months of 2024, driven primarily by ongoing strain in personal and private banking. Looking ahead, the credit loss ratio is expected to remain within but near the top of the group’s through-the-cycle credit loss ratio range of 70 to 100 basis points, for the 2024 financial year.

Absa: non-performing loans grew 20% to R80-billion

For the year to end December 2023, Absa reported that credit impairment charges climbed 13% to R15.5-billion. Absa’s credit loss ratio increased from 96bps to 118bps, exceeding Absa’s through-the-cycle target range of 75 to 100bps. Non-performing loans increased to 6.05% of total gross loans and advances, due to elevated inflows into later-stage delinquencies in the South African retail portfolios. Absa group chief executive, Arrie Rautenbach says non-performing loans grew by a whopping 20% to R80-billion from R67-billion the year before.

Nedbank: ‘acutely aware of macro challenges that clients face’

Nedbank’s credit loss ratio for the year to end December 2023 increased to 109bps, above its 60 to 100bps through-the-cycle target range. However, Nedbank chief financial officer, Mike Davis says the bank remained adequately provided even as total expected credit loss (ECL) coverage increased to an annual high of 3.62%. “We remain acutely aware of some of the macro challenges that clients will continue to face, and we remain highly focused on our collections and recoveries capabilities, while at the same time, maintaining our strategies to originate quality business,” Davis said.

First Rand: ‘judicious and tactical approach to lending’

Outgoing chief executive, Alan Pullinger says the bank continues to employ a judicious and tactical approach to lending, supporting its customer franchises whilst protecting the balance sheet and return profile. “This remains a necessary balancing act given the operating environment, which is still characterised by high inflation and interest rates, combined with sluggish system growth and increased competition,” he said, commenting on the bank’s half-year results to the end of December 2023.  The overall credit performance continues to trend better than the bank’s initial through-the-cycle (TTC) expectations and is a direct outcome of its origination approach. This has resulted in a credit charge of 101bps for the period under review, which is below the mid-point of First Rand’s through-the-cycle range of 90bps – 120bps.

Natsas says the banks continue to hold a stable level of credit provisions on these loans, as reflected by the specific impairment coverage ratio. “Collection efforts are starting to be tested as non-performing loan volumes increase in the current credit cycle. Greater focus is therefore expected on collection strategies and execution,” he says. DM