Only 70% of all unsecured loans are up to date. Something’s got to give.
The world’s leading credit rating agency, Moody’s Investor Services, expected the SA Reserve Bank to fully protect African Bank’s creditors because of the “importance in terms of policy” of unsecured lending to poor households. Moody’s analyst Nondas Nicolaides told City Press on Friday that even though African Bank was not systemically important in the same way as the four major banks that take deposits from the public, its “unique role in the market” nonetheless made a 100% bailout the default expectation.
The reserve bank’s failure to do that led to Moody’s downgrading all South Africa’s major banks this week. This followed its more severe downgrading of Capitec by two notches.
In particular, the agency is criticising the decision to impose a “haircut” on African Bank’s creditors.
For senior bondholders, this comes to 10% and for subordinated creditors it could be a great deal more.
This demonstration of the “willingness to impose losses” is what knocked all the banks down the ratings scale. Capitec received extra punishment because it is more involved in risky unsecured lending than the big banks.
The reserve bank has criticised this as being in “sharp contrast to the support actually provided”, implying that the support given to the creditors of African Bank was, in its mind, generous.
The likelihood of sovereign support was “not eliminated, just lowered”, according to Nicolaides.
The reserve bank’s actions demonstrated “a shift in the policy of the regulator”, he told City Press.
“Our previous view was a higher level of systemic support for the four largest banks in South Africa.”
Nicolaides said that as part of its rating methodology for banks, Moody’s has a formula for determining the systemic support incorporated into ratings and “the probability of systemic support is an important integral part of that formula framework”.
The reserve bank has also vocally rejected any suggestion that African Bank’s collapse in any way reflects the stability of the banking system as a whole, which Moody’s accepts.
The episode has shown up an important difference between the thinking of the world’s top credit rating agencies. While Moody’s hinges its ratings on the likelihood of a full bailout of creditors if a bank fails, Standard & Poor’s does not.
It told Business Day this week “sovereign support” does not factor into its rating of the banks and it criticised the logic of Moody’s that the African Bank bailout indicates what to expect if a normal bank, which takes deposits and has a lending business outside of high-risk personal loans, were to go belly-up. Fitch Ratings made the same point on Friday, saying African Bank, unlike the others, is not “systematically” important or likely to affect the bigger banks.
While African Bank was far more risky than any other bank, it was actually average in terms of the entire unsecured lending market.
At the end of March, the total amount of unsecured credit, from registered lenders in South Africa, came to R173 billion. Only 70% of these loans were up to date with repayments, according to the National Credit Regulator. African Bank was exceptionally exposed to risky loans by the time it was placed under curatorship this month. Its nonperforming loans made up 31% of its R60 billion loan book – exactly the national average.
Capitec, which is battling the perception that it is similarly steeped in the unsecured lending bubble, has made provision for 11% of its R33.7 billion loan book. The big banks have been at pains to demonstrate that the crisis in unsecured lending has little impact on them because they do a great deal more secured lending and have more stringent criteria for personal loans.
While that is true, their accounts for personal loans and credit cards demonstrate the same deterioration that can be seen in the major retailers.
Despite the overall health of the major banks, their financial statements bear testimony to the crisis consumers find themselves in, with only FNB having no discernable deterioration in its personal loans.
The retail sector also forms part of the financial services sector as most large retailers make much of their money from the fees and interest on credit – not the actual sale of goods.
The general degeneration of the credit-dependent consumer is even more visible here.