Renee Bonorchis

South Africa’s fourfold increase in unsecured lending is spurring bubble worries for Atlantic Asset Management, while Momentum Asset Management sees opportunities for higher returns.

The money managers do not agree on the merits of R2.5 billion of bonds sold by Capitec Bank, the fastest expanding South African lender with 20 percent of the market for loans not backed by assets.

Atlantic, which manages R3.7bn of fixed-income investments, says the race for loans resembles the US subprime market before its collapse.

Momentum, which owns Capitec debt among its R72bn in assets, says the listed lender has enough cash to guard against shocks.

Banks are turning to unsecured lending where they can charge interest rates five times higher than that on mortgages. Investors demand 238 basis points more for Capitec’s five-year bonds over similar-dated government debt. That compares with a premium of 90 basis points on the three-month euro interbank offered rate for a five-year senior bond backed by UK credit card loans, according to JPMorgan Chase.

Capitec, South Africa’s seventh-largest bank by value, was created in 2001 and now has almost 4 million clients and more than 500 branches, according to its website. The value of loans provided by Capitec more than tripled to R19.4bn between 2009 and the end of February.

“The growth has been enabled by the cheap funding available,” Arno Lawrenz, the chief investment officer at Cape Town-based Atlantic Asset Management, said on August 29. Investors were “falling over themselves to provide funding”.

Yields on Capitec’s 11.55 percent of R175 million notes due in February 2019 have dropped more than 100 basis points since being sold on January 27 to 10.42 percent by the close on August 31.

Capitec will lend as much as R230 000 to individuals over seven years while larger rival African Bank Investments caps its biggest unsecured loan at R180 000 over the same period.

Riaan Stassen, the chief executive of the company, based in Stellenbosch near Cape Town, said in January that in time Capitec wanted to be able to offer a R1 million loan within minutes.

The value of unsecured loans taken out in South Africa has surged fourfold to R121bn over the past three years, the Johannesburg-based securities unit of Australia’s Macquarie Group said in an August 28 statement. The number of mortgages issued over the same period declined 16 percent a year, according to Cape Town-based research house Eighty20.

Unsecured loans account for 9 percent of total credit in Africa’s largest economy, compared with 4 percent at the end of 2007, according to Macquarie. Over 7 million consumers were more than three months in arrears, with half of them “deeply impaired”, the National Credit Regulator said in a report last month.

The US subprime collapse began when mortgages to poor consumers fell into default as interest rates rose and investors who were holding the highly-rated debt backed by those loans lost their money.

“The scene was set for subprime by the low interest rates in the US at the time, and by the insatiable demand for higher yield among investors,” Lawrenz said.

Reserve Bank governor Gill Marcus cut the benchmark repo rate by 50 basis points to 5 percent on July 19, the lowest in more than 30 years, to spur economic growth.

Impairment charges at Capitec rose 62 percent to R1.6bn in the fiscal year through February, while the value of loans advanced increased 35 percent to R19.4bn, it said on March 28.

The company, which said on August 28 that first-half earnings growth slowed, had a capital adequacy ratio of 39 percent at the end of February.

Default rates at Capitec, which were 28 percent of total loans in fiscal 2012, were in line with the company’s forecasts, Carl Fischer, the executive director of marketing and corporate affairs, said in a response to questions on August 29.

Most loans were made to customers earning more than R15 000 a month, he said.

Moody’s Investors Service has maintained Capitec’s credit ratings at an investment-grade A2 national long-term rating.

With assistance from Esteban Duarte in Madrid. – Bloomberg