Increasing consumer stress and slow growth have prompted a more careful approach to lending.
Banks will be more cautious about lending in the coming financial year, prompted by concern about increased pressure on consumers and companies through cost increases and a slow economic recovery.
Banks have indicated they tightened up credit scoring on unsecured lending last year, after data released by the central bank in October 2012 revealed that by the end of June unsecured lending had risen to R381-billion, up 21% from a year earlier — outpacing growth in home loans and car financing.
Added to this was the increased focus on the banking sector after Absa issued a profit warning last June as a result of an increase in bad-debt costs related to mortgages. In February 2013, Absa posted a worse-than-expected 9% drop in full-year earnings, citing a decline in earnings on mortgages and commercial property loans.
Despite a 2% revenue increase, its headline earnings to the end of December fell to R8.8-billion from R9.7-billion in 2011.
FirstRand and Nedbank released their financial results at the start of March and, despite showing a 29% half-year profit for FirstRand and a 19% full-year profit for Nedbank, both banks said they plan to take a more constrained approach to lending to middle-income groups in the near future.
FirstRand said in its Stock Exchange News Service statement on March 5 that it expected "difficult macroeconomic conditions to continue for the rest of the financial year", although it saw potential for growth.
Pressures on consumers
Analysts said that banks were very aware of the pressures being placed on consumers, with high fuel and electricity prices, food inflation and high interest rates. One analyst said the increase in personal loans since June "suggests that there is already some distress" in the market.
He said that by "tightening up their scorecards", banks were increasingly shoring up for a rainy day, although at present, there was still room for healthy growth.
"Banks are clamping down on things like second house loans as they are seen as more risky and second car loans because cars are depreciating assets."
FirstRand chief executive Sizwe Nxasana said on the release of the half-year data that the bank had reserved R500-million in additional provisions on top of the R800-million set aside in June 2012 in anticipation of a tightening credit environment and more difficult market conditions for customers dealing with other cost increases.
Bad debts increased 18% for FirstRand, which it said was a smaller increase than had been expected, but it had taken the "prudent decision" to increase portfolio provisions, resulting in a total increase in bad debt of 37%.
Nedbank Retail, which returned to profitability in 2010 after being hard hit by the 2009 recession that left many borrowers unable to service their mortgage debt, has reduced the time frame for impairment of a loan, determining that a loan is 100% impaired after five cumulative months of missed payments instead of six. It has put aside R333-million in 2012 to make up for the methodology change.
In its February results, Nedbank reported R19.6-billion in performing loans, R2.6-billion in defaulted loans and write-offs of R1.6-billion, up 66% on 2011 from R1-billion.
Nedbank said it was focusing on improving its retail business and boosting fees from transactions in the new year to ensure continued growth.
Both Nedbank and FirstRand said they expected loan growth to slow in the near future.
Nedbank's chief executive Mike Brown said in a Moneyweb interview in February that the bank's personal loans business, which had been growing at 40% in its half-year results, had dropped to 28% for the full year. He said that, as consumer stress increased in general, because of increases in administrative prices, "you are going to see us slow our lending in the unsecured environment and in particular ... personal loans".
Growth in personal loans
David Shapiro, an investment expert at Sasfin, said that, as an investor, while he was encouraged by the strong economic data for Nedbank and FirstRand, from an economic point of view he was concerned about the growth in personal loans indicated in their financial statements.
"Both Nedbank and FirstRand appear to be making money from personal loan increases and the big question for me is: What are these loans being used for? Housing mortgages are low, so are they being used to buy motor cars or food?"
Shapiro said such spending did not encourage long-term growth.
"It would be more encouraging to hear that the profit from loans was the result of businesses borrowing to build factories or to expand. The economy is still being propped up by consumer spending and I question how long it is sustainable. If miners strike for more wages, we see higher salaries, but less consequent expansion from businesses.
"The danger is that a consumption-led economy is undermining growth. The money is not being put into fixed investment. At the moment, the bulk of the money being spent on products like clothes or goods such as iPhones is benefitting other countries, not boosting South African exports."
Equity analyst for Cadiz Asset Management Adrian Cloete does not believe that banking profit growth on the back of loan growth and non-interest revenue growth indicates more distressed consumers.
"The results from Nedbank and FirstRand still indicate that non-performing loans, as a percentage of advances, continue to trend down," he said. The bad-debt ratio had been a far greater problem a few years ago after a lending boom between 2005 and early 2008 was followed by a global recession.
"The South African banking sector is one of the most highly rated in the world, with a good credit system. The banks have made provision for bad debt. In that part of the business, there will always be people who cannot pay their debts, but they provide and price for it," he said.
"Another advantage to consumers is that by migrating to bigger banks, they are seeing lower loan rates."
Cloete said there had been strong consumer income growth from 2010 and this had to be taken into consideration when looking at loan growth. He said banks were not just lending to consumers, but to the corporate sector, and this had increased by at least 10% during 2012.