Interest rates are crushing South African consumers

ABSA says the higher-than-expected interest rates in South Africa are hurting its clients, with the number of credit impairments rising

In a voluntary trading update for the six months ended 30 June 2023, ABSA said that group revenue for the first half of 2023 is expected to increase by low teens year-on-year, despite weaker economic growth and higher interest rates than expected,

The group said this is driven by strong mid-teen interest income growth year-on-year, reflecting low double-digit growth in gross customer loans and deposits and net interest margin expansion due to higher interest rates.

The group expects high single-digit non-interest income growth, with the Africa Regions set to deliver strong growth and insurance revenue.

Additionally, the bank expects positive operating JAWS and its cost-to-income ratio to improve by roughly 50% on the back of this strong revenue growth.

However, it noted that its consumers are under pressure due to the high-interest rates.

Following the latest interest rate hike from the South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC), the repo rate and prime lending rate currently stand at 8.25% and 11.75%, respectively. – with fears that it could interest rates could be hiked even further.

Absa said that the high-interest rates have led to a considerable rise in credit impairments.

“With South African consumers under pressure due to significantly higher interest rates, credit impairments are expected to increase substantially, resulting in a credit loss ratio of between 1.25% and 1.30%,” Absa said.

The bank said its return on equity for the period is thus likely to be slightly below 17%.

Several other banks in South Africa have also seen a rise in credit impairment charges.

Standard Bank said that credit impairment charges in the first five months of 2023 were 50% higher than in the comparable period in 2022, as consumer strain, larger lending books and increased sovereign debt risk across Africa weighed heavily.

Although Standard Bank’s overall credit loss ratio was in its target range of 70-100 basis points, the credit loss ratio for consumer banking clients was outside its target range of 100 – 150.

African Bank also recorded a massive increase in credit impairment charges on loans and advances, growing by a mammoth 240% to R2.24 billion (H122: R658 million). This led to a credit loss ratio of 11.1% (H122: 4.8%).

In its interim financial results for the six months ended 31 March 2023, African Bank said that its retail consumers were negatively affected by the poor economy, with high food and fuel prices affecting their ability to pay their debt.

In its financial results for FY 2023, Capitec also noted that its total net credit impairment charges on gross loans and advances increased by 80% to R6.4 billion (2022: R3.5 billion).

Capitec said this was caused by the economic turmoil at the time, such as Russia’s invasion of Ukraine and load shedding, following a post-pandemic boom in FY22.

Not all bad for ABSA

Despite the increased use of common equity tier 1 capital ratio, Absa said that it expects to increase its dividend payout to at least 52% for the period.

It added that it expects IRFS and normal Headline Earnings Per Share for the first half of 2023 to only increase by mid-single digits year-on-year, but this comes off a relatively high base.

The group will release its 2023 interim financial results on 14 August 2023.

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