Johannesburg - South Africa’s big four banks are tightening the rules around lending as non-performing loans rise, according to consulting firm PwC.
An analysis of the performance of Absa, FirstRand, Nedbank and Standard Bank showed non-performing loans grew 0.3 percent in the first half of the year after contracting 6.7 percent in the second half of last year.
Most of the damage was in the retail credit sector, specifically credit cards and a category described as “other loans and advances”.
PwC noted that low-income households had been affected by “subdued growth in disposable income and higher living costs”. And it warned that customers in this segment “who are already on the margin” could experience “further credit stress”.
Banks are providing for a potential increase in losses from non-performing loans.
According to PwC, banks are also moderating their unsecured lending approvals as the Banking Association of SA reviews the rules for this category of credit extension. Unsecured lending has ballooned in recent years but figures are hard to come by.
PwC Africa banking and capital markets leader Johannes Grosskopf said banks did not report separately on this category of lending.
In contrast, mortgage lending saw non-performing loans fall more than 7 percent, “reflecting improved recovery in the residential property market”. Corporate lending also saw a drop in non-performing loans.
PwC highlighted “the unprecedented default of First Strut’s listed corporate bonds”. However, it said: “Industry consensus is that the total exposure of the major banks is not significant and is adequately provided for.”
In a difficult environment, earnings rose 11.5 percent on average in the first half of the year, compared with the same period last year, PwC reported.
This was partly due to cost reductions by banks. The average cost-to-income ratio fell to 54.1 percent from 56.6 percent in the first half of last year.
However, spending on information technology continues to grow and salary costs are rising due to annual increases and incentive awards “associated with the banks’ improved operating performance”.
Despite increased capital requirements under Basel 3, return on equity (RoE) rose to 16.1 percent in the first half, compared with 15.9 percent in the previous six months and 15.6 percent in the comparable period last year.
However, PwC warned that that the “new economics of banking” would require a shift in shareholder expectations about RoE.
The regulatory requirement to hold more equity by definition makes it increasingly difficult to maintain the earlier levels of RoE.
Also a challenge is the Basel 3 call to increase liquidity reserves in relation to lending. The country’s low savings rate makes it difficult for banks to attract long-term deposits.
A major trend in South Africa is the banking expansion into the rest of Africa. However, PwC explained that it was difficult to aggregate the results of operations in Africa due to lack of disclosure by the banks and differences in the life cycles of their operations in the region.
“As these operations grow and their contributions to earnings grow, we expect investors will seek additional disclosure of the return,” it said.
PwC noted banks would have to balance the need to grow “with the ever increasing cost of funding that growth”. - Business Report