South African households are in serious trouble

Finance group Capitec has published its annual financial results for the full year ended February 2023, showing that South African households are under extreme pressure and struggling to keep head above water amid a growing cost of living crisis.

At the end of its financial year, Capitec counted 20.1 million clients as part of its client base, meaning one in three South Africans bank with the group.

This gives the bank unprecedented insight into the financial health and habits of South Africans at large, and how the prevailing economic conditions in the country impact them.

The data, however, paints a worrying picture.

Capitec noted that its clients spent, on average, 8% more on groceries and 16% more on fuel for the 2023 financial year compared to the previous financial year.

The increase in spend on groceries was tempered by the effect of clients buying more affordable products, the group said.

South Africans are also increasingly turning to credit and loans to boost monthly income, with Capitec noting that the value of the average loan debit order increased by 20%, personal loans increased by 12%, and the average vehicle finance debit order grew by 15% over the year.

These increases were driven largely by the higher repo rates, the group said.

While spending and loan repayments increased, the average increase in income into client accounts only grew by 4% compared to 10% for the comparative period, showing that money coming in is not keeping up with money going out.

Overtime and bonuses have also been truncated, dropping from 18% to 15% in the latest financial year.

This has forced households to spend less in other areas: home maintenance spending is down 13%, alcohol purchases are down 9%, and pharmacy spending is down significantly – 30%.

Worryingly, spending on education has also dropped by 15%, and insurance spend has also declined by 1%, showing that sacrifices are being made in various areas.

Capitec said that it has recorded a steady increase in the number of insufficient funds transactions among its client base, where 10.7% of all transactions are overdrawn.

* Insufficient funds transactions measured on all card transactions, cash withdrawals and debit orders, as a % of total transactions

Defaulting on loans

A more telling sign of the stresses South African households are facing is in the sharp increase in credit impairments recorded by the bank.

The group’s gross loans and advances increased by 16% to R97.8 billion (2022: R84.1 billion), and the provision for credit impairments (ECL – expected credit losses) grew from R17.6 billion to R19.6 billion.

The group’s total net credit impairment charge on gross loans and advances increased by 80% to R6.3 billion (2022: R3.5 billion).

According to Capitec, the massive jump in the credit impairment charge needs to be understood in the context of the last four years. In the group’s 2020 financial year (ie, pre-Covid), these impairments were around R4.3 billion.

During Covid (FY2021), households were hit hard by the impact of the pandemic, with lockdowns, job losses and economic turmoil wreaking havoc on budgets. During this time, impairment charges shot up, and lending conditions tightened.

For FY2022, there was a strong post-pandemic recovery, and the impairment charge dropped to R3.5 billion. It’s off of this low base that the economic turmoil in FY2023 – with the Russian war, load shedding, etc – caused impairments to shoot up once again.

The impairments can also be understood in terms of new sales over the same period. New loans during Covid slowed down significantly, and now during the ‘normalisation’ period, sales are again increasing.

Despite this context, Capitec said that, as economic conditions put pressure on credit clients in FY2023, there has been an increase in clients going into debt review, rolling into arrears and default, and balances being rescheduled.

The group also noted that while loan application approvals have dropped as conditions have been tighter (45% approved in FY2023), the demand for loans has increased significantly, with the group receiving over 4 million applications over the period (up from 3.5 million the year before).

On a more positive note, Capitec said the average 12-month forward-looking baseline macroeconomic indicators obtained from the Bureau for Economic Research, currently utilised in calculating the forward-looking macroeconomic provision, indicate that the outlook is not as negative as it was a year ago.

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