South African consumers are taking a beating

 ·20 Jun 2023

Standard Bank says the difficult economic environment in South Africa has led to a substantial increase in credit impairments for the first five months of 2023.

In a voluntary trading statement, the bank said that the global economic and geopolitical environment remains volatile, with global growth slowing due to high inflation and interest rates.

The group said earlier hopes that inflation would ease and the economy would see steady growth in 2023 have receded.

“Public debt as a ratio to GDP increased across the world during Covid-19 and is expected to remain elevated, posing a growing challenge for policymakers as interest rates are rising and revenue collections are slowing in many African countries,” the group said.

“Since providing an update on the group’s operational performance in April, the macro-economic outlook in South Africa has deteriorated further. Expectations are now that inflation and interest rates will be higher for longer and that economic growth will remain constrained.”

“At the end of May, the South African repo rate had increased by 125 basis points in 2023 to 8.25% and a further 25 basis point increase is anticipated in the second half of the year. The ZAR has been pressured by a strengthening USD and dampened investor sentiment.”

Despite the difficult environment, the group said that its results for the five months ended 31 May 2023 (5M23) reflected a healthy balance sheet.

“Continued balance sheet growth in support of our clients, the endowment impact of higher interest rates, improved customer activity levels and increased use of our risk management capabilities in volatile trading environments all contributed to strong top-line growth. Our Africa Regions franchise has delivered remarkable growth during this period and contributed 46% of the group’s headline earnings.”

For the reporting period, banking activities grew in excess of 20% higher than the first five months of 2022 (5M22), with higher-than-expected average interest rates in most of its markets supporting net interest income growth.

However, credit impairment charges for 5M23 were nearly 50% higher than the charges in 5M22, as the larger lending books, consumer strain in South Africa, and increased sovereign debt risk across Africa all had an effect.

Although the credit loss ratio for the 5M23 was elevated, it was still in the group’s overall cycle target range of 70-100 basis points.

However, the credit loss ratio for consumer banking clients is outside of the group’s target range of 100 – 150 basis points.

“Credit impairments related to consumer banking customers are currently elevated, primarily in South Africa and, particularly, in home loans, on the back of rapid interest rate hikes and sustained high inflation levels, which has resulted in some customers being unable to meet their debt obligations in full.”

Moreover, the credit loss ratio for the Business and Commercial Banking is also outside of the group’s target range of 100 – 120 basis points due to a buildup of nonperforming loans, mainly in the single names in Africa Regions and the small enterprise segment in South Africa.

However, the Corporate and Investment Banking credit losses are below the 40 – 60 basis point cycle range for customer impairments.

The group was still quick to note the weak trading results of several clients across its network, with the decline in the consumer sector having a knock-on effect on its corporate client base.

Not the first bank

Several banks in South Africa have recorded a rise in credit impairments across the last year.

In its interim financial results for the six months ended 31 March 2023, African Bank said that its credit impairment charges on loans and advances grew by an astounding 240% to R2.24 billion (H122: R658 million), resulting in a credit loss ratio of 11.1% (H122: 4.8%).

African Bank said that its retail consumers suffered the most amid the poor economic climate due to high food and fuel prices, which was affecting their ability to service their debt.

Capitec, South Africa’s largest bank by number of customers, also recorded a major increase in credit impairments in its annual financial results for the year ending February 2023.

The group’s total net credit impairment charges on gross loans and advances jumped by 80% to R6.4 billion (2022: R3.5 billion) following the economic turmoil in FY2023 – the war in Ukraine and load shedding – from a post-Covid-19 boom in FY22.

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