Capitec and African Bank closing the taps

African Bank and Capitec have been stricter about giving out credit, as they are cautious about reducing and maintaining their credit impairments.

African Bank recently released its interim results for the six months through March 2024, which revealed a strong financial performance.

The bank swung profitable, reporting a R203 million profit compared to a loss of R43 million in the previous comparable period.

The bank’s credit impairment charge on loans and advances decreased significantly. It declined from R2.24 billion in 2023 to R1.36 billion – a 40% decrease.

This enabled a big decrease in the bank’s credit loss ratio, which dropped to 6.6%, down from 8% in the 2023 financial year.

This number is also within the bank’s target to maintain a credit loss ratio of less than 7%.

The bank said most of its business banking division loans are secured and performing well, resulting in a 1.7% (H1 2023: 0.3%) credit loss ratio for the reporting period.

The bank explained that it experienced peak credit impairments last year and has since made a concerted effort to enhance collection initiatives aimed at driving down impairments.

African Bank pointed to the pandemic as a major driver of its high impairments in previous years.

The pandemic devastated local and global economies, which still have not fully recovered from the impact, including African Bank’s customers, reflected in the bank’s impairments.

It credits the impairment decrease to the bank’s enhanced credit granting criteria and improvements to its collections and rehabilitation processes.

“Management is satisfied with the actions taken over the past year to address the higher risk levels experienced in the first half of FY23,” the bank said.

The poor economic climate, exacerbated by high food and fuel inflation and load-shedding, negatively affected its retail banking customers’ affordability and ability to service their debt. 

Therefore, in the past year, African Bank has focused on updating and tightening credit granting criteria to address the rising credit impairment charge and lower collections.

“This had the effect of substantially reducing the quantum of loans advanced in the second half of FY23 and into the first half of FY24,” it said.

“Management actions included tightening the credit criteria by limiting the offer sizes and tenures of loans advanced. Enhanced collections and various fraud detection strategies were also implemented.” 

Capitec has followed a similar strategy after experiencing a spike in credit impairments last year.

Capitec CEO Gerrie Fourie said the bank will remain cautious and maintain its strict lending rules until South Africa’s economy improves.

For the financial year ending on 29 February 2024, Capitec’s net credit impairment charge on loans increased by 37% to R8.4 billion. Its credit loss ratio was 10.1%, up from 8.0% in 2023. 

This happened after the bank tightened its lending rules in 2023 due to increasing bad debts.

In November 2021, Capitec eased its lending rules for some clients recovering from the Covid-19 pandemic. This led to growth in their loan book, especially in access facilities.

However, after the war in Ukraine started in February 2022, Capitec began tightening lending rules again in June 2022 and kept them strict through 2023.

In September 2023, Capitec reported that high interest rates and inflation were putting financial pressure on consumers, increasing the bank’s credit impairment charge and credit loss ratio.

For the six months through August 2023, Capitec’s net credit impairment charge grew by 62% to R4.8 billion, mainly due to more loans moving into higher-risk stages.

As a result, Capitec reduced access facility limits by R3.5 billion in the second half of 2023. 

By February 2023, more clients were entering debt review, falling behind on payments, and defaulting. 

The stage 3 loan book increased to R18.5 billion from R13.9 billion in February 2022, prompting further tightening of lending rules in 2024.

In Capitec’s results presentation, Fourie said the bank will remain cautious regarding its lending criteria.

“If you look at the economy, we all know it’s on thin ice,” he said. “In August I said Ukraine/Russia looks like it stabilised, and nothing else must happen in the world.” 

“Then Israel happened, and now two to three weeks ago, Israel/Iran took place, and all of that has an impact on South Africa.” 

“So, our focus on the credit side is going to be on business banking on the secured side, but we will be very cautious in the retail space.”

Fourie told Daily Investor that Capitec would only consider relaxing its lending criteria if South Africa achieves high economic growth and interest rates are down. “Then we can open up,” he said.