Bankers have been quick to downplay weak results from one of South Africa’s largest providers of unsecured loans, saying the decline in profits at African Bank Investments Limited (ABIL) does not portend more wide-spread problems in the sector.
On May 20 ABIL announced that earnings for the six months ending March 30 dropped 26% compared to the previous year, due in part to a rise in bad debt provisions associated with an increase in non-performing loans (NPLs). Earlier in May, the bank had issued a statement warning of lower-than-expected results, in which ABIL’s chief executive manager, Leon Kirkinis, said NPLs would weigh on the bank for the rest of the year. “We expect the [bad debt] charge will remain elevated in the course of the year ahead, given that the slowdown in NPLs is expected to kick in at the tail-end of the 2013 year,” he said on May 9 during a conference call with shareholders.
The number of unsecured loans sector-wide has risen steadily in recent years, with more than 1.6m on the books of South African banks as of the end of 2012, up from the 700,000 two years before. According to the latest financial stability report from the South African Reserve Bank (SARB), issued in late April, the sector’s total exposure to unsecured credit had grown to $48bn as of the end of 2012, up from $43.3bn in September.
While this increase was well over 10% for the quarter, unsecured loans still account for just 11% of gross credit exposure, according to central bank data. Moreover, industry participants have been quick to downplay concerns regarding the rapid expansion of this segment of the market. “I do not see the risk of a ‘credit bubble’ ahead, and anticipate the growth rate in unsecured lending to moderate over time,” Michael Brown, CEO of Nedbank Group, told OBG. He added, “South Africa has an emerging middle class and there are a lot of structural reasons for why this sector should be growing faster than others.”
Nonetheless, the industry is well aware of the need to balance growth with the risk of bad debt, while at the same time taking into consideration social concerns, such as over-indebtedness. To this end, the Banking Association of South Africa has drafted a code of conduct for unsecured lending, while regulators are also taking a closer look. In November 2012 the SARB and the Treasury signed an agreement to develop new rules that will promote responsible lending and protect consumers.
However, according to Luthando Vutula , CEO of UBank, a financial services provider with a focus on mining communities, more oversight is not necessarily the answer. “There is no need for further regulations, but the market needs responsible lenders that understand customer needs and provide access to financial products at reasonable costs.”
Indeed, it can be difficult to argue against the expansion of the formal banking system into previously under-served communities. As Dube Tshidi, Executive Officer of the Financial Services Board, the capital markets regulator, told OBG, “We need to provide access to finance for those previously disadvantaged, and to do so sometimes you have to break rules and be more lenient. Once more people are in the system, the financial sector will see sustained and systemic growth.”
For now, concerns about the stability of the overall banking system seem premature. According to data from the SARB, capital adequacy ratios (CARs) are well above the central bank’s minimum requirement, and the overall ratio of NPLs stands at less than 5%. Moreover, CARs are trending up while NPLs are moving down, both good signs.
Indications are that unsecured lending by banks will ease during the rest of this year, as borrowing appetite slows and the banks themselves tighten up their credit criteria. This will still leave a large bloc of unsecured credit, with NPL ratios likely to rise if the economy continues to mark time. All of this could have an effect on bank earnings, while also reducing credit availability across the economy.