Moody’s: South African Unsecured Lenders face Asset Quality Pressures

South Africa’s unsecured consumer lenders are facing rising asset quality risks and higher loan loss provisioning expenses, owing to a trio of the challenging domestic operating environment; loan book seasoning; and the reduced flexibility of credit providers to take rapid remedial action to improve asset quality, warns Moody’s Investors Services.

However the credit ratings agency (CRA) says in its report, entitled
‘South Africa’s unsecured lending market faces rising asset-quality risks’
, that it expects the sector to avoid a ‘hard landing’ scenario in light of the current moderate inflation and interest rate environment, as well as heightened regulatory scrutiny.

“South Africa’s unsecured consumer lending market has experienced significant growth in recent years, following the introduction of the National Credit Act in 2007,” says Christos Theofilou, a Moody’s analyst and co-author of the report. “This growth was also supported by the decline in interest rates to a near 40-year low, and strong nominal wage increases.

“However, the sector is now facing increasingly challenging operating conditions, which, combined with the seasoning of loan books, will lead to further asset-quality deterioration and higher loan loss provisioning expenses.”

Against this background, recent data from South Africa’s National Credit Regulator (NCR) show a continued deterioration in non-performing loans (NPLs) in the unsecured consumer lending market to 16.6% of total loans as of March 2013 (March 2012: 14.2%).

“Moody’s expects further asset-quality deterioration as a consequence of, firstly, the challenging operating environment, including subdued economic growth and labour market unrest; secondly the seasoning of loan books, following a 30% compounded annual growth rate (CAGR) since 2007; and thirdly credit providers’ reduced flexibility to take rapid remedial actions to improve asset quality, given substantially increased loan sizes and tenors,” says Theofilou.

Moody’s expects that the credit impact for large commercial banks will be limited as unsecured lending constitutes a small portion (around 5.5%) of their loan portfolios.

In contrast, the CRA expects specialised unsecured lenders to be adversely affected by a deterioration in asset quality, but the agency differentiates between, firstly, the larger rated unsecured lenders which will be cushioned by their sizeable capital buffers, high margins and strong underwriting capabilities; and secondly smaller, less-sophisticated, non-bank unsecured lending providers (unrated), which remain the most exposed to a deterioration in asset quality, particularly because of their weaker underwriting capabilities and lower capital and profitability buffers.

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