Only 70% of all unsecured loans are up to date

2014-08-24 15:00

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The world’s leading credit rating agency, Moody’s Investor Services, expected the SA Reserve Bank to fully protect African Bank’s creditors because of the “importance in terms of policy” of unsecured lending to poor households.

Moody’s analyst Nondas Nicolaides told City Press on Friday that even though African Bank was not systemically important in the same way as the four major banks that take deposits from the public, its “unique role in the market” nonetheless made a 100% bailout the default expectation.

The reserve bank’s failure to do that led to Moody’s downgrading all South Africa’s major banks this week. This followed its more severe downgrading of Capitec by two notches.

In particular, the agency is criticising the decision to impose a “haircut” on African Bank’s creditors.

For senior bondholders, this comes to 10% and for subordinated creditors it could be a great deal more.

This demonstration of the “willingness to impose losses” is what knocked all the banks down the ratings scale. Capitec received extra punishment because it is more involved in risky unsecured lending than the big banks.

The reserve bank has criticised this as being in “sharp contrast to the support actually provided”, implying that the support given to the creditors of African Bank was, in its mind, generous.

The likelihood of sovereign support was “not eliminated, just lowered”, according to Nicolaides.

The reserve bank’s actions demonstrated “a shift in the policy of the regulator”, he told City Press.

“Our previous view was a higher level of systemic support for the four largest banks in South Africa.”

Nicolaides said that as part of its rating methodology for banks, Moody’s has a formula for determining the systemic support incorporated into ratings and “the probability of systemic support is an important integral part of that formula framework”.

The reserve bank has also vocally rejected any suggestion that African Bank’s collapse in any way reflects the stability of the banking system as a whole, which Moody’s accepts.

The episode has shown up an important difference between the thinking of the world’s top credit rating agencies. While Moody’s hinges its ratings on the likelihood of a full bailout of creditors if a bank fails, Standard & Poor’s does not.

It told Business Day this week “sovereign support” does not factor into its rating of the banks and it criticised the logic of Moody’s that the African Bank bailout indicates what to expect if a normal bank, which takes deposits and has a lending business outside of high-risk personal loans, were to go belly-up.

Fitch Ratings made the same point on Friday, saying African Bank, unlike the others, is not “systematically” important or likely to affect the bigger banks.

While African Bank was far more risky than any other bank, it was actually average in terms of the entire unsecured lending market.

At the end of March, the total amount of unsecured credit, from registered lenders in South Africa,

came to R173?billion. Only 70% of these loans were up to date with repayments, according to the National Credit Regulator.

African Bank was exceptionally exposed to risky loans by the time it was placed under curatorship this month. Its nonperforming loans made up 31% of its R60?billion loan book – exactly the national average.

Capitec, which is battling the perception that it is similarly steeped in the unsecured lending bubble, has made provision for 11% of its R33.7?billion loan book.

The big banks have been at pains to demonstrate that the crisis in unsecured lending has little impact on them because they do a great deal more secured lending and have more stringent criteria for personal loans.

While that is true, their accounts for personal loans and credit cards demonstrate the same deterioration that can be seen in the major retailers.

Despite the overall health of the major banks, their financial statements bear testimony to the crisis consumers find themselves in, with only FNB having no discernable deterioration in its personal loans.

The retail sector also forms part of the financial services sector as most large retailers make much of their money from the fees and interest on credit – not the actual sale of goods.

The general degeneration of the credit-dependent consumer is even more visible here.



The black hole inside African Bank was the furniture retail group Ellerines, which it bought in 2008.

Ellerines owns the Ellerines brand as well as Beares, Furniture City, Wetherleys and Dial-a-Bed.

In its last financial year before African Bank’s recent implosion, Ellerines wrote off 31.5% of its loan book, about R2?billion, and still had a further 25% of loans classified as nonperforming because they were more than three months overdue.

Ellerines responded by extending less credit. In the nine months to the end of June, the effect of that was a 12% drop in sales to R2.8?billion.

The part of sales done on credit fell from R2?billion to R1.5?billion. The company was placed in business rescue shortly before African Bank’s curatorship this month.

But the general contraction in credit – and the increasing inability of people to repay the loans and accounts they have spreads far beyond Ellerines and African Bank.

JD Group

(Bradlows, Barnetts, Electric Express, Joshua Doore, Morkels, Price ‘n Pride, Russells, Supreme, HiFi Corp, Incredible Connection, Timber City and others)

JD Group fell into a lossmaking position in the second half of last year – mostly because of a jump in “debtors’ costs”.

Half of that was debts written off and the other half new provisions for debts that are overdue.

The group’s debt cost escalated to R1.1?billion in the half year to December, pushing it into a loss of R159?million.

The jump in bad debt in the half year was sudden and severe with a threefold increase compared with a year earlier. The debt cost was equal to the full year debtors’ cost incurred by the group in the entire 2009, which had been the worst on record.

JD Group is owed about R8.7?billion by people who bought things on credit. About half of that sits in accounts that are more than a month overdue.

Back in 2012, the ratio was just 25%.


(Lewis, Best Home and Electric, My Home and Monarch Insurance Company)

Lewis’ results for the year to March tell a similar tale.

The group makes almost the same amount of money from finance and insurance charges as it does from selling merchandise.

Its revenue of R5.3?billion included finance charges of R1.2?billion and insurance premiums of R688?million.

The problem is that the finance income has to be weighed against the losses caused by debtors that stop paying.

Lewis’ debtor costs jumped to R702?million from R540?million a year earlier – mostly in the form of bad debts and repossession losses. Lewis has about 680?000 account holders and the number of those that are “satisfactorily” up to date on payments is eroding every year.

The percentage that is nearly up to date was 74.5% in 2011, but is now 68.3%. Lewis is still making money, although the drop in its net profit from R911?million to R842?million is largely due to the jump in debt costs.

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