SA banks face a lending dilemma

SA banks are caught in a conundrum: they either lend into a stagnating economy or wait for signs of life. Should growth not pick up soon, it may not matter which way they go.

One of the world’s highest unemployment rates, tax increases, record fuel prices and gross domestic product (GDP) that hasn’t expanded more than 2% since 2013 are taking their toll on businesses and consumers.

Lenders have fought off the onslaught by boosting earnings from the rest of Africa and keeping costs and bad debts at bay.

If the slump persists, earnings could start shrinking, according to Denker Capital’s Jan Meintjes.

“In a low-growth environment, the banks try to tread water. It’s difficult for them to grow their customer base,” while managing expenses gets harder the longer it takes to revive the economy, he said.

The finance ministry is working on a stimulus package to be unveiled later this month.

For the moment, most lenders have tightened the credit taps amid political uncertainty ahead of elections next year and state-owned companies that are bleeding cash.

The recovery plan will have to be implemented within existing spending limits.

According to Bloomberg Intelligence, total loan growth in the sector has been 3% to 4% annually since late 2016, below the inflation rate and weighing on revenue.

FirstRand achieved 7% annual revenue growth in the past two years, said Bloomberg Intelligence’s Philip Richards.

Absa and Standard Bank grew between 1% and 2%. Capitec Bank expanded its book by 3% in the six months to August, year on year.

For revenue to improve, banks need a rebound in the economy, to have the confidence to accelerate lending, said Patrice Rassou of Sanlam Investment Management.

Both are impossible without confidence.

Having gone through the lean years, banks will be well-positioned to benefit if the economy’s fortunes improve, he said.

Meintjes also believes banks will remain profitable even during the period of weakness.

Uncertainty over the ANC’s efforts to change the Constitution to ease land expropriation without compensation also looms.

Banks have extended over R1.6 trillion in mortgages. The potential uncertainty about expropriation will have a knock-on effect on the mortgage market, potentially stalling activity, says Richards. – Bloomberg