Banks are rushing to reduce souring home loans as bets increase that interest rates will climb from their lowest levels in more than 30 years.
Two-year interest-rate swaps, used to lock in borrowing costs, have risen 23 basis points this month to 5.39 percent, the highest since last July and indicating that investors are raising bets the repo rate will increase by early 2015. That compares with a 7 basis point dip for similar contracts in Mexico, which has the same credit rating as South Africa.
Big banks increased bad debt provisions last year as concern that higher fuel and electricity prices would erode disposable income outweighed the benefits of lower interest rates.
FNB is restricting mortgage lending further to cut default risk as a widening current account deficit weakens the rand and forces the central bank to raise its inflation forecast.
“It’s a race to get those loans sorted out,” said Jan Kleynhans, the head of FNB’s mortgage unit, which aims to cut its non-performing loans by more than half from 4 percent of lending to less than 2 percent. “We’ve still got some way to go.”
FNB planned to extend a pilot programme started last October that restricted home loans to its own customers as the prospect of higher interest rates added to default risk, head of mortgage sales Ewald Kellerman said.
FNB boosted bad debt provisions to 20.8 percent of its R159 billion of mortgages at the end of last year, from 19.6 percent a year earlier.
Standard Bank, South Africa’s biggest home lender, increased its coverage ratio to 26 percent of its R300bn of home loans from 20 percent previously.
Absa reported a jump to 28.5 percent of its R237bn mortgage book from 17.1 percent.
While the Reserve Bank kept its benchmark interest rate unchanged at 5 percent last week, it raised its inflation forecast for the year, citing the rand as the main risk.
A record R24.5bn trade deficit in January added to pressure on the currency after the fourth-quarter current account gap was near a four-year high.
The rand has weakened more than 18 percent against the dollar over the past 12 months, the worst performer among 16 major currencies tracked by Bloomberg.
The weaker rand is fuelling consumer inflation, which accelerated to 5.9 percent last month. Inflation this year may be stoked by increased fuel and electricity costs and the introduction of tolls on some freeways in Gauteng.
“Household debt to income is very problematic as most employed individuals have probably not had increases to keep up with inflation and certainly have pressure from administered price hikes,” said Brigid Taylor, head of institutional sales at Nedbank in Johannesburg. “A rate hike will be an additional pressure on disposable income.”
The rand, weighed down by violent labour strikes, uncertainty over government policies and concerns over power supplies, slumped to a four-year low of R9.366 a dollar last Thursday. It declined 4.95c to be bid at R9.2993 to the dollar at 5pm yesterday.
The yield on the benchmark 10.5 percent government bond due in 2026 has climbed 14 basis points this month to 7.44 percent, after reaching a four-month high of 7.51 percent last Thursday.
The result of the Reserve Bank monetary policy committee’s next rate-setting meeting will be announced on May 23.
“The risks for the rand and inflation seem to be on the upside,” Chantal Valentine, an economist at Coronation Fund Managers in Cape Town, said last week.
“It’s not impossible that the central bank may be forced to raise rates sooner, perhaps even later this year, to preserve its credibility.” – Bloomberg