A new South African law bringing relief to over-indebted, lower-income consumers is unlikely to deal as severe a blow to banks and retailers that some investors may fear, according to Bank of America Merrill Lynch analysts.<\/p>\n
Describing the legislation as ‘a bogey, but no cause for alarm’, BofAML analysts including Michael Jacks said in a note that retailers have already provisioned for the projected impact on their bad debt.<\/p>\n
Banks would typically classify debt that qualifies under the new law under impairments, mitigating its effects.<\/p>\n
Legal challenges from creditors are likely, while the national credit body will need to add operating capacity, slowing its implementation.<\/p>\n
Retailers with higher proportions of customers using credit may feel the effects in slower growth, with the targeted income groups accounting for an average of 40% of shoppers at the Foschini Group Ltd., Truworths International Ltd., and Mr Price Group Ltd.<\/p>\n
A 5% debtors\u2019 book write off would have a 2% negative earnings-per-share impact for Foschini and Truworths and 1% for Mr Price due to lost interest income, while damping future credit growth.<\/p>\n
“Credit accounts for 70% of Truworths Africa sales, 45% at Foschini and 18% at Mr Price,” BofAML said, adding that “both Foschini and Truworths have already made provisions for this bill in their provisions for bad debts in their last set of results.”<\/p>\n
Among banks, Capitec Bank Holdings Ltd. has the highest exposure to the targeted income group and one-time impairments could erase 13% of EPS and 4.7% of recurring profits.<\/p>\n
However, Capitec management has “been actively reducing exposure to affected loans and note conservative provisioning relative to write-off experience, which should temper this outcome.”<\/p>\n
Absa Group Ltd, the second-most exposed lender, could see a one-time blow to EPS of 9.8%, while FirstRand Ltd could lose 8.6%, Standard Bank Group Ltd 7.4% and Nedbank Group Ltd 6.5%.<\/p>\n
As unsecured loans account for just 8% of total unsecured advances by banks and only 1% of total bank advances, the law is likely to have a muted impact on South African economic growth, they said.<\/p>\n