/ 3 December 2010

Cars and houses, not credit cards, drive credit growth

Private-sector credit in South Africa is growing at 10,2%. Stanlib economist Kevin Lings explains that this robust growth is worked out on a three-month annualised basis and most of the increase has been in the form of asset-based finance — that is, cars and houses. It’s a very good sign that the growth is coming from cars and houses, not from credit cards.

In contrast, credit card debt continued to decline, falling by 5,8% since last September (the data available lags by a month). The outstanding balance on household’s credit cards has now declined, on an annual basis, for the past 19 consecutive months, showing that consumers are still unwilling to use credit for daily purchases.

Also, household incomes have risen in real terms over the past few quarters, so consumers have been able to pay with cash more readily.

As consumer credit performance improves, we can probably expect to see growth in private-sector credit. “Household credit comprises around 52% of total credit, so a rise in household credit will reflect a rise in overall private sector credit,” said Lings. “At the moment, the growth in corporate credit remains extremely modest, mostly because companies are not expanding and have fairly healthy balance sheets with a fair amount of cash on hand.”

Meanwhile, mortgage credit rose by a modest 0,2% during October (R1,75-billion in the month). The rate of increase is subdued, says Lings, because potential customers are struggling to meet affordability criteria as set out in the National Credit Act (NCA).

Overall credit growth is clearly looking a little more encouraging. During the early part of 2010 there was some concern, especially by the bank analysts, that credit demand was not improving. But recovery is usually driven by a rise in incomes, not a rise in credit, which emerges later in the cycle. The delay in credit growth also shows that the banking sector is still digesting bad debts and are no longer offering the “two-below-prime” deals they did a couple of years ago.

Lings still anticipates credit growth, though. “We expect it to move higher during the remainder of 2010 and more meaningfully higher in 2011, as the combination of 30-year-low interest rates, improved real income growth and the slightly easier lending criteria out of banks start to have a more positive effect,” Lings said. But he cautions that overall credit growth probably won’t surge to levels experienced previously, given the National Credit Act and the banks’ still fairly restrictive approach to granting credit.

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