A waiting game for banks as job losses threaten unprecedented credit losses

The three-month payment holiday that banks gave qualifying consumers is coming to an end soon, and an increasing number of consumers are starting to panic about how they'll keep up with their repayments after June.

As many people employed in the retail and hospitality sectors are losing jobs or earning only a fraction of what they used to, banks are struggling to project just how much credit losses they could end up with this year.

The SA Reserve Bank has given them some breathing room, requiring banks to hold less reserves than before, and to apply some leniency when treating non-performing loans caused by the coronavirus (Covid-19). But while this will certainly help, it won't take away all their worries, say analysts.

"Yes, the measures help up to a point. That point is when the borrower losses their job or the business is liquidated. At that point, the favourable treatment no longer applies, and the full credit losses need to be recognised," says Avior Capital Markets analyst, Harry Botha.

Botha says while not all consumers will move to this default stage, given the rapidly growing number of companies who are retrenching and business closing their doors, banks are facing the unknown but hopefully the R200 billion SME loan guarantee scheme that President Ramaphosa announced in April can help keep businesses operational.

No quick bounce back

While banks initially offered a general three-month payment holiday to their customers, credit bureau Transunion, which conducted two surveys in April, found that the number of consumers who had their work hours reduced increased significantly in the latter part of April. The length of time they won't be able to pay their bills is also increasing, and so is their bills payment shortfall.

Debt counselling company DebtBusters says people already under debt management have been asking their creditors for more debt restructuring. These are mostly people who would not have qualified for the standard repayment holidays banks have been offering, as it was extended to consumers who were up to date on their accounts. Consumers who qualified for the repayment holidays had a breather, and thus no immediate need to enrol for debt counselling. 

"What we are seeing already from the credit bureaus is that more people are having their debt rearranged or taking up payment holidays. But the option of repayment holiday is soon going to run out, and then what are the options consumers will have? I expect that they will want to have another extension for few more months," said DebtBusters CEO, Benay Sager.

Before banks announced the payment holiday offer, Benay said DebtBusters received 50% more debt counselling enquiries in the first three months of this year compared to the same time in 2019. The repayment holidays have likely slowed what would have been exponential growth, says Sager. Once these are no longer an option, he anticipates an uptick again.

A waiting game

Richard Cheesman, senior analyst at Protea Capital Management, said banks are better capitalised this time than they were confronting the 2008/09 global financial crisis. Both the relaxed capital requirements and withholding dividends have put them in an even better position to deal with Covid-19-induced shocks. But they are dealing with the unknown.

"Clearly it is too early to tell how bad things will get. A lot depends on how quickly the economy will reopen," said Cheesman.

Nolwandle Mthombeni, analyst at Mergence Investment Managers, said the number of jobs that SA will shed because of the virus, the length of each lockdown level and the ultimate GDP contraction - factors which are all still unknown - make forecasting bad debt and credit losses impossible. But banks don't have the luxury to figure things out over time. SA is pinning its hopes on them to avoid total mayhem.

"The buck stops with the banks. You have consumers who are not getting enough income to service their own debt. And then corporates can't service their debt and they have to get relief from the banks," said Mthombeni.

She said it is also not obvious which banks are at higher on credit losses. For instance, while Capitec serves a bigger proportion of low-income earners who are more susceptible to job losses, its credit client base is largely public sector employees.

"The only way that they will have really massive losses is if government starts retrenchments which we don't expect. So, it's not as clear cut as whether the bank's customers are higher income or low-income earners," said Mthombeni.

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