Research firm raises red flag over banks

STEEP growth in unsecured lending by South African banks in recent years led to the sector being downgraded by international research organisation IHS last week, placing new question marks over a sector widely thought to be on the mend after the 2008 financial crisis.

Though IHS is not a ratings agency like Moody’s and Standard & Poor’s, which means the impact of its downgrade is likely to be muted, investors will still take note of the red flag.

This is especially so because banking shares have gained ground this year, with Nedbank up 11.4% since January, FirstRand up 7.3%, Standard Bank up 4.6%, and Capitec up 10.9%.

Absa’s share price fell 11.7% in that time, while microlenders other than Capitec took a beating. African Bank’s price tumbled 42%, while Blue Financial Services lost 40.9%

The All Share index rose 15.46% over that time.

IHS’s five-point downgrade has now moved South Africa’s banking sector into the “medium-risk” category from the “moderate risk” category, largely because of risk associated with the unsecured lending boom. This downgrade places South Africa in the same risk category as Nigeria.

The Reserve Bank estimates that unsecured loans make up 12% of all total loans which, although low, have not stopped analysts from worrying about the potential blowout in the unsecured lending space.

Matthew Warren, banking sector analyst at First Avenue

The sector’s heavy exposure to households is concerning

Investment Management, said: “I don’t have any doubt that the growing problems in unsecured lending will contaminate the broader consumer-lending landscape to some extent.

“We are already seeing it in credit cards and car loans. I suspect housing will follow for middle-market consumers that have taken on too much unsecured debt.”

Whether the downgrade is warranted is debatable.

A Business Times analysis of the “credit-loss ratio” of their loan book — a number that measures the impairments charge as a percentage of average advances, or the loss on every R1 given out as loan — shows South African banks still appear to be healthy, with the possible exception of Absa.

Standard Bank, for example, incurred a loss of 1.08c for every rand owed by customers in 2012 — down marginally from the 0.87c loss of the year before. FirstRand, the parent company of First National Bank, improved its number to 0.99% — which means less than 1c of every rand was lost — from 1.08% the year before.

Nedbank’s credit loss ratio was 1.1% of total loans for 2012, while Absa’s credit loss ratio was the only one that escalated sharply, to 1.59%.

IHS senior economist Alyssa Grzelak said consumers remained particularly vulnerable to any stress.

“The sector’s heavy exposure to households is particularly concerning in light of households’ high debt levels, which are near all-time highs at more than 75% of disposable income.”