African Bank joins growing number of banks tightening lending criteria

African Bank
African Bank
  • African bank has set aside a R550 million provision in anticipation for a spike in bad debt
  • The bank has already experienced a 25% reduction in its collection
  • The bank has tightened its lending criteria to protect the quality of its lending book
  • Absa and Discovery Bank have also announced that they will not be chasing credit growth

It might get just a little harder for consumers who don't have the best-looking credit records to borrow money as more banks tread carefully on how they assess risk in anticipation of a spike in defaults because of Covid-19.

On Wednesday, African Bank said it had become more stringent in its criteria when assessing loan applications.

"We have, in fact, after this reporting period, implemented more stringent criteria than what was in place before. It's more important for us to manage that and to react very proactively to that," said the bank's CFO, Gustav Raubenheimer.

African Bank, which has humble beginnings as a microlender, has in fact been a little risk averse since it came out of curatorship in 2016, growing its retail advances by just 3% year-on-year in the six months to March. From September 2019, African Banks' lending book actually declined from R30.2 billion to just over R30 billion by March 2020. In comparison, many of the big banks have been growing advances by higher single or double digits.

Raubenheimer said even before Covid-19, the bank thought it was better to react to macro-economic stresses by tightening its underwriting criteria. This led to a 25% reduction in the issuing of new loans.

African Bank joins the likes of Absa and Discovery Bank, who recently told investors that they'd rather put brakes on growing their lending market share right now. Discovery went on to acknowledge that as a new bank, this will put a damper on growth, but it was a risk it was willing to take to protect the quality of its book.

Karl Gevers, head of research at Benguela Global Fund Managers, said with the high level of uncertainly for the year ahead, it made sense for banks not to chase market share growth right now.

Already seeing worrying signs

African Bank also told investors that it had decided to err on the side of caution with its impairment provisions. The bank has already recorded a 25% drop in collections, 9% of which was a result of payment relief that it offered to clients at the beginning of the lockdown.

The bank it has set aside a R550 million Covid-19 specific provision in anticipation that more clients might fall on hard times. The bank has mapped out its client base according to industries they work in to try and anticipate the risk it faces. About 28% of its loans were advanced to customers employed in the services sector, where it has graded about 30% as medium and high risk.

"The R550 million has been informed by two assumptions. The first is the grading of our customers employers into high, medium and low risk buckets and then associating increased probability of defaults into the medium and high buckets," said Raubenheimer, explaining this high level of impairment provision.

He added that given that the bank had already seen a reduction in collections, it also anticipated that this might worsen.

Give that a banking group as big as Investec said in May that its expected credit loss impairment charge stood at £133.3 million (about R2.8 billion), African Bank seems to be anticipating more bad news.

Raubenheimer said the bank decided to be more conservative on its assumptions when calculating the amount it needed to set aside for impairments and actually provided over R1.5bn more than what its models required.

Nolwandle Mthombeni, investment analyst at Mergence Investment Managers, said African Bank is exposed to most sectors impacted by Covid-19, and therefore it is forced to have a relatively higher proportion of impairment provision.

Richard Cheesman, senior analyst at Protea Capital Management, said given that African Bank only has exposure to unsecured lending, this provision made sense because that market generally has higher default rates and a higher loss given default as there is no collateral for the loans it issues.

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