Capitec and Standard Bank closing the taps

South African banks are tightening the taps by extending fewer loans to households compared to previous years due to high and rising default rates.

This was revealed in the South African Reserve Bank’s (SARB) latest Quarterly Bulletin, which painted a picture of a South African economy facing a credit slowdown. 

While the central bank stopped raising interest rates in May 2023, this has not reignited borrowing.

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 – with banks feeling the pinch of this “bad debt”.

The SARB’s Quarterly Bulletin showed that year-on-year growth in total loans and advances extended by monetary institutions to the domestic private sector decelerated gradually from 9.9% in February 2023 to 3.1% in April 2024.

However, there’s a contrast between sectors. Businesses saw a notable increase in borrowing in the first quarter of 2024, particularly for general loans, but this surge was short-lived. 

In contrast, household credit growth has been on a steadier decline across most credit categories.

From a business perspective, they borrow less due to weak confidence and rising costs. 

This is reflected in a significant decline in corporate loan growth, which fell from 12.1% in February 2023 to a post-pandemic low of 2.6% in January 2024. A temporary uptick in borrowing in March wasn’t sustained.

In terms of household credit extension, consumers are also pulling back on borrowing. This is likely due to a combination of factors, including higher interest rates, stricter lending standards by banks due to rising defaults, and potentially a more cautious spending approach in the face of economic uncertainty. 

Household loan growth slowed from 8% in January 2023 to 3.4% in April 2024, with credit card borrowing particularly affected.

Despite the slowdown, overall credit extension is still marginally outpacing economic growth. This means that the country’s debt-to-GDP ratio is still creeping up. 

Banks keeping their taps shut

Several local banks have expressed their intention to keep the taps closed until South Africa’s economic environment improves to avoid bad debt piling up.

For example, in June this year, Standard Bank announced that it is keeping its lending taps tightly shut following an increase in credit impairments. 

The bank said an increasing number of clients cannot repay their loans due to elevated interest rates and a higher cost of living. 

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.”

African Bank and Capitec have expressed similar sentiments.

African Bank explained earlier this year that it experienced peak credit impairments last year and has since made a concerted effort to enhance collection initiatives to drive 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.

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.

“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 lower interest rates. “Then we can open up,” he said.