Bad-debt ratio improves for banks
While the financial world worries about a double-dip recession South African banks reported a decrease in bad debts. Three of the majors, Standard Bank, Nedbank and Absa released interim reports for the first half of 2011, which showed growth largely due to a decrease in bad debt thanks to lower interest rates. But analysts warn this is not an early sign of recovery.
Standard Bank’s credit-loss ratio fell from 1.04% in the first half of last year to 0.80% this year and the group generated headline earnings of R6.6-billion—up 11% on the corresponding period last year.
The credit-loss ratio, also known as the bad-debt ratio, is the amount provisioned by banks for bad debt or non-performing loans. The bad debt and expenses subtracted from a bank’s income will determine the profit before tax.
Absa’s credit-loss ratio is down to 1.18% from 1.50%, while its headline earnings are up 19%. Nedbank reported that its credit-loss ratio fell to 1.21% this year from 1.46% in 2010. The group also experienced a 26.3% rise in first-half headline earnings.
FNB, a subsidiary of FirstRand, announces its year-end results only on September 12. But its interim results published in early March showed that FirstRand’s bad debt took a dip from 1.52% in December 2009 to 0.92% at the end of 2010. In a press statement the group said earnings continued to be driven by significant decreases in retail bad debts.
In its report Nedbank said credit-impairment levels improved as a result of a better credit environment and affordability levels, with enhanced collection capabilities and reduced levels of defaulted advances.
Lebogang Molebatsi, the head of financial research at Stanlib, said it was important to remember that when the economy slowed, the Reserve Bank had stimulated it in the form of interest rates at a 35-year low. Molebatsi said it was a common view in the market that banks’ tightening of credit belts had improved the credit-loss ratio, but he disagreed. “There hasn’t really been any additional tightening since 2009. Ultimately, it comes down to the affordability of loans for customers.”
Louis von Zeuner, deputy group chief executive at Absa, said the drop indicated the consumer had started recovering. “Over the past year the consumer has received salaries or wages higher than inflation and so there is more cash flow and they are servicing their debts better.”
But he warned that while there was liquidity, there had been little change in the debt-to-income ratio although consumers were at least able to get “up to date”. Debt counselling has also had an impact on the figure. “The cases have either moved into legal proceedings or the consumer is beginning to repay their debt.”
But Von Zeuner said this shouldn’t be read as an early sign of recovery. “A recovery means there must be an improvement in the debt-to-disposable-income ratio and better employment figures.”
Econometrix economist Tony Twine said banks had continued to extend new credit to borrowers, but had been cautious about the quality of borrowers since the recession and the implementation of the National Credit Act.
Borrowers, he said, were also more cautious. “On the optimistic side it implies that bank customers are managing their debt-to-income ratios more successfully than during the recession, while on the pessimistic side, it may imply that the lenders are highly risk averse. Both imply that bank credit is not driving whatever economic growth there may be at present.”
Looking forward, Nedbank group expects impairments to continue to improve with the reduction in the credit-loss ratio, but to remain above the upper end of the group’s target range of 0.60% to 1.00%.
Standard Bank said current global economic uncertainty showed little sign of abating and the events of the past few weeks pointed to further volatility and softer prospects for global economic growth.
Von Zeuner agreed that events in the United States showed global market uncertainty and that market recovery was uneven. He warned that increased interest rates or a decline in property prices could mean a return to a rise in bad debt.
Twine said recent asset-market volatility and rising pressure on both disposable income and the discretionary spending portion of that after-tax income would probably make lenders and borrowers act with renewed caution.
Less risky lending by banks would inevitably improve their impairment ratios, he said. “The downside risk would be the possibility of a second major economic dip, which would obviously place huge pressure on debt-to-income ratios and increase the probability of default among marginal borrowers.”