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AfricaApril 21 2021

South African banks’ loan books merit scrutiny amid Covid crisis

Loan portfolios have been skewed towards unsecured lending over the last decade, according to Capital Economics.
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South African banks’ loan books merit scrutiny amid Covid crisis

As South Africa grapples with the fallout from a brutal second wave of Covid-19 the composition of banks’ loan books could become an area of concern, according to Capital Economics.

The country is the worst affected on the African continent, recording more than 1.5 million infections and more than 53,000 deaths.

The last decade has seen South African banks’ loan portfolios become increasingly skewed towards unsecured lending to low-income households, said Jason Tuvey, senior emerging markets economist at Capital Economics, and amid the economic fallout from Covid-19, servicing this debt could become a burden for a rising number of people.

Unsecured lending — led by general loans and credit cards — made up about 28% of bank loans before the financial crisis and now makes up close to 40%, Mr Tuvey said. “This type of lending is riskier given the lack of collateral and it has been geared towards low-income individuals who can have more unstable employment,” he said.

South African banks are also exposed to problems at the country’s state-owned enterprises (SOEs). Debts owed by SOEs amount to about 2% of banks’ total loans, according to Capital Economics.

State power utility Eskom supplies about 90% of South Africa’s electricity but has been hamstrung by a debt burden of more than R450m ($31.4bn). Eskom has been unable to tackle its debts because it has not been allowed to raise tariffs sufficiently to cover its costs, leaving the country struggling with regular power cuts.

“Eskom is stuck between low tariffs and rising debt servicing which means it cannot sufficiently invest in the electricity infrastructure, which then holds back the economy and puts more pressure on the government to provide fiscal support,” Mr Tuvey said.

Other struggling South Africa SOEs include state-owned flag carrier South African Airways and state arms procurement company Armscor.

Risks at smaller banks

Banks’ non-performing loans (NPLs) have risen from about 4% of total loans at the beginning of 2020 to 5.2% in January this year and banks have absorbed rising losses on their loan books in their profit margins.

However, the South African Reserve Bank most recent financial stability review suggested that there is capacity in the system for NPLs to rise further.

According to the central bank, under a ‘stress’ scenario – in which NPLs reach 9% of total loans – capital buffers at the country’s systemically important financial institutions would still remain above the minimum prudential requirement of 12.4%.

“If problems do emerge, they are more likely to materialise in smaller and medium-sized banks where the incidence of bad loans is much greater,” Mr Tuvey said. “Nonetheless, further increases in bad loans will continue to weigh on banks’ profitability and credit conditions will be kept tight.

Mr Tuvey added that South African banks are likely to be anticipating a further souring of loans.

Banks voluntarily offered debt repayment relief to customers at the height of the crisis – equal to R33.6bn or 0.7% of gross domestic product as of October – and these loans have not had to be recognised as being impaired, he said. “As these schemes unwind, bad loans are likely to rise.”

The five largest banks in South Africa — accounting for 85% of total assets — are Investec, FirstRand, Standard Bank Group, Absa Group and Nedbank Group, according to The Banker Database

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Read more about:  Regulations , Africa , South Africa