What’s next?

Only 70% of all un­se­cured loans are up to date. Some­thing’s got to give.

CityPress - - Business - DE­WALD VAN RENS­BURG de­wald.vrens­burg@city­press.co.za

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.

Gill Mar­cus

Non­das Ni­co­laides

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