Capitec flags bad debt concerns for South Africa
Despite the expected interest rate relief next month, Capitec has warned of the impact high interest rates and inflation have had on consumers and says elevated bad debt is still a significant concern.
The South African Reserve Bank (SARB) has raised interest rates by a significant 475 basis points (bps) since 2021, a move aimed at curbing inflationary pressures in the economy.
However, this tightening of monetary policy has had unintended consequences, particularly on the credit impairments of banks in the country.
As interest rates increased, borrowing costs surged, leading to higher monthly repayments for consumers with existing loans, mortgages, and credit facilities.
With inflation also rising, driven by factors such as fuel price increases and global supply chain disruptions, consumers have found themselves under severe financial strain.
The combination of higher debt servicing costs and elevated living expenses has made it increasingly difficult for borrowers to meet their financial obligations, resulting in a rise in credit impairments.
Banks in South Africa have reported a noticeable uptick in non-performing loans (NPLs) as more customers default on their repayments.
The higher credit impairments impact banks’ balance sheets, leading to increased provisioning for bad debts and a reduction in profitability.
In its recent financial results, one of the major South African banks highlighted the challenges posed by the deteriorating credit environment, noting that the rise in impairments was directly linked to the ongoing economic pressures faced by consumers.
Capitec agrees and told BusinessTech that it has identified elevated levels of bad debt as a significant concern for 2024.
“Despite some moderation in inflation, it remains persistently high, impacting repayment rates.
“The financial strain is primarily driven by high inflation and base interest rates that have reduced disposable income and affordability for many South Africans,” it said.
Capitec’s warning is unsurprising, considering that the SARB expects South Africa’s commercial banks to lose over R100 billion in the current financial years as they continue to raise provisions to cover non-performing loans.
The Reserve Bank’s data showed that the banking sector’s NPLs for the most significant asset classes are at their highest levels in a decade and are still rising.
It warned that this could manifest in rising credit losses, which could reduce bank capital and profitability.
The highest ratio of NPLs is in unsecured retail loans, which is usually the first asset class to exhibit increasing stress.
Although corporate loans have one of the lowest NPL ratios, the growth in NPLs for this loan category has averaged over 50% since the third quarter of 2023.
NPLs for secured retail lending (for loans made against collateral such as houses and cars) have grown more than 30% on average since September 2023.
This risk is especially true for Capitec.
Capitec rose to success by catering to the lower-income segment of South Africa. This strategy served Capitec well.
However, one shortcoming of this strategy is that Capitec carries greater credit risk than its competitor banks.
This is because Capitec’s book is unsecured, whereas the other banks’ books are mainly secured.
The good news is that some interest rate relief is on the horizon for South Africans.
Key economists expect a 25-basis-point rate cut at the next meeting in September 2024, likely followed by another 25-basis-point cut at the final meeting in November.
This positive shift is expected to continue into 2025, with forecasts of a 150 bps cut in total by July 2025.
This is expected to give a notable boost to South Africans servicing debts, especially those with car and home loans.
Capitec added it has proactively tightened credit-granting criteria since November 2022, successfully reducing impairment charges.
“Looking ahead, we will continue to monitor economic conditions closely and may consider gradually easing these criteria if we observe sustained improvements in the economic environment,” it said.
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