South African banks are closing the taps
South Africans are increasingly using their credit cards, even if banks are becoming more cautious in extending credit.
According to Nedbank’s latest assessment of the broad money supply and credit, demand for credit reduced in the household market, primarily due to a slowdown in home loan growth from 4.7% in October to 4.0% in November and the drop in personal loans from 3.9% to 3.5%.
That said, transactional credit demand remained relatively resilient.
Although households withheld from drawing down overdrafts (only increasing 0.3% yoy), they continued to use credit cards to sustain spending, which was intensified during Black Friday and Cyber Monday promotions.
Credit card growth thus grew slightly from 9% in October to 9.1% in November.
“Despite this, household credit demand is waning as falling asset prices, higher interest rates, and relatively poor economic prospects erode household confidence, incomes, and balance sheets,” Nedbank said.
“At the same time, commercial banks are more cautious in extending credit given these vulnerabilities and rising defaults, reinforcing the cyclical downturn in credit growth.”
Credit impairments have severely hit several South African financial service providers since the South African Reserve Bank started its interest rate hiking cycle in late 2021.
“Given significantly higher policy rates, our credit loss ratio is expected to exceed our through-the-cycle target range of 75 to 100 basis points,” Absa said in a voluntary trading update for the year ending 31 December 2023.
“Our second-half credit loss ratio is likely to improve noticeably from the elevated first half but remain above our through-the-cycle range.”
Outlook
The credit demand slowdown will likely continue into the first half of 2024 as households feel the cumulative impact of the interest rate hikes that will continue to filter through the economy.
This will keep debt service costs high, forcing households to be more cautious in borrowing and spending.
“At the same time, banks will be wary of extending loans given the rising debt defaults,” Nedbank said.
“Corporate demand will continue to be supported by renewable energy projects. However, the upside will be contained by fading profits and high operational costs, which will likely convince many companies to trim large capital expenditure plans.”
“We expect credit growth to improve gradually during the second half of next year as the interest rates ease and the economy recovers slightly.”
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