Standard Bank keeping the taps closed

Standard Bank is keeping its lending taps tightly shut following an increase in credit impairments. An increasing number of clients are unable to pay back their loans due to elevated interest rates and a higher cost of living. 

The Reserve Bank has hiked interest rates by 475 basis points over the past few years to combat inflation, and commercial banks have benefited from the extra interest revenue. 

High interest rates increase the cost of servicing debt, as repayments on mortgages, car loans, and other forms of lending rise in lockstep with the repo rate. 

Commercial banks initially benefit from rising interest rates as they collect more interest from their existing set of loans, greatly increasing their profit margin. 

This is compounded by the fact that the interest rates offered on savings accounts do not rise as fast as the interest rates charged on loans. 

However, as interest rates remain elevated for longer, this effect wears off as clients begin to face pressure and cannot pay off their loans. 

Some of the country’s largest banks are starting to feel this effect, with Standard Bank flagging a rise in credit impairments in the first five months of the year. 

In a pre-closed trading period call with investors, the bank’s CFO Arno Daehnke noted that over the past few years, its income growth was supported by higher interest rates, but this effect has been reversed. 

“In the restated five months of the last year, income growth was supported by higher average interest rates and higher client transactional volumes but dampened by lower trading revenues,” he explained. 

While changes in interest rates have increased net interest income, Daehnke said this has delayed an equal and opposite increase in credit impairment charges this year. 

“The elevated credit charges resulted in a credit loss ratio for the period being above the top of the groups through the cycle target range of 100 basis points.” 

“This is not unexpected considering the stage of the cycle and the fact that the credit loss ratio is traditionally higher in the first six months of the year relative to the second.”

Daehnke said the year-end credit loss ratio will be around 100 basis points as the bank sees positive developments in its retail banking segment. 

These positive developments are largely due to the bank tightening its lending criteria in the last full financial year to prevent a build-up of non-performing loans. 

At the presentation of its full-year results for 2023 earlier this year, Daehnke noted that the bank’s loan growth was far lower than in 2022 due to its tighter lending criteria. 

For example, the growth in home loans was nearly flat at only 2% for the year, and loans to small businesses declined by 5%. 

Credit cards and unsecured lending also had limited growth at a mere 2%.

This was also helped by a slight reduction in the demand for credit through 2023, but overall demand still outstrips supply. 

Rating agencies, such as S&P, have warned that South African banks will have to continue limiting credit extension throughout 2024 as non-performing loans rise. 

It said the combination of lacklustre economic growth and rising bad debt would subdue the appetite for more credit and reduce banks’ willingness to extend credit. 

S&P estimates that credit growth will be lower in 2024, averaging around 5% after lending plunged in 2023. 

The declining extension of credit can be seen in the graph below showing Standard Bank’s loans and advances broken down by product. 


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