JOHANNESBURG Suggestions in a recent Wall Street Journal article that problems in South Africas unsecured lending market are amounting to a subprime-loan crisis for the country are incorrect, according to CEO of Capitec Bank, Gerrie Fourie.
Fourie explains that inflated house prices were a significant driver of the USs subprime mortgage crisis in 2008, as individuals took out bonds that were larger than the real value of their homes. We lend against income and expenses, so you cant have an inflated situation. Theres a fundamental difference between what happened in the US and ourselves, Fourie tells Moneyweb.
Capitec, which reported a 21% climb in headline earnings to R1.2 billion for the six months ended August 2014, says it has strict affordability assessments and prudent provisioning. It provides 8% for loans that are up to date, 46% for clients who are behind with one installment, 74% for two installments and 87% for three installments. After 90 days in arrears it writes the loan off.
However, its doubtful that all other unsecured lenders are as conservative as Capitec, which even takes into account the size and stability of a loan applicants employer and the sector in which that employer operates before granting a loan.
Proposed amendments to affordability assessments in the National Credit Act (NCA) are still more lenient than Capitecs current model, according to chief executive of marketing and corporate affairs, Carl Fischer. Capitec has met with the NCR to point out loopholes in affordability guidelines and areas that are not strict enough.
African Bank for example would only start to provide for a loan once someone was more than three months in arrears, whereas Capitec is 100% provisioned at this point. It is extremely conservative and rightly so in this risky market, comments Jean-Pierre Verster of 36ONE Asset Management.
Although positive on Capitecs fundamentals, Verster is concerned that there may be knock-on effects of the steep contraction in lending from African Bank (Abil), whose disbursements under curatorship are less than half of what they were before they were placed under the control of a Reserve Bank-appointed curator in early August due to untenable levels of bad debt.
Verster points out that in the unsecured lending market, consumers will often take out a loan from one lender to pay another known as lsquo;borrowing from Peter to pay Paul. Since there is an overlap between Abil and Capitec clients, hes waiting to see what the vintages will be of the larger, longer-term loans issued by Capitec now that Abils credit tap is but a trickle.
His concerns are not unfounded. One of the largest debt review agencies in South Africa, DebtBusters says it has seen a 30% jump in enquiries since September 1 having done nothing different with its marketing. My assumption is that it is a month after Abil was placed under curatorship and presumably tightened lending criteria and that has caused lots of consumers to be unable to roll their unsecured debt with the use of another personal loan, comments Ian Wason, CEO of the Intelligent Debt Management (IDM) Group, which owns DebtBusters. The 30% jump has been consistent through the month and certainly hasnt tailed off, he says.
Nonetheless, Verster believes that if Capitec can see through the current storm it will establish itself as the biggest and strongest unsecured lender in South Africa, while also giving primary banks a run for their money by offering the lowest cost-banking product.
With a capital adequacy ratio of 38%, Capitec is 3x leveraged, which is lower than other larger banks that are around 7x leveraged, presenting less financial risk, Verster says.
In the light of Abil, youre looking at chalk and cheese, comments senior investment analyst at Old Mutual Equities, Neelash Hansjee. He says that while the numbers are good and Capitec has been fairly resilient, as a result of actions taken by management to slow loan sales, Old Mutual remains cautious on the consumer.
How else will people pay for housing?
Since banks have not created a model to address the housing need in South Africa, unsecured lending is vital, stresses Fourie. He says around 93% of mortgages granted in South Africa are above R350 000, with the number of people with a mortgage remaining stagnant at 1.8 million over the past seven years. There is a need for R500 000 and lower mortgages and no one is in that particular market. The only way to get credit is in the unsecured market, he points out.
NCR figures reveal that more than 50% of the value of the unsecured lending market goes to people earning R15 000 a month and more. Increasingly the more formal, higher income person is using the segment because its the only way to gain access to credit, says Fischer, who says that Capitec will provide vehicle finance in time.
It has recently partnered with SA Home Loans as a distribution partner for mortgages, performing an in-branch affordability assessment and then passing qualifying clients on to SA Home Loans.
Capitec points out that South Africas formal credit market is only seven years old, saying it is now bottoming out and should stabilise in the next seven to ten years. There is a future for unsecured lending, though we tread cautiously as the industry is still maturing, it says.