Cut in credit demand, rise in bad debts are lethal combination
July 8, 2008
By Mzwandile Jacks
High interest rates, which were still rising, had reduced demand for credit from 28 South African retail banks, including the big four, and had caused bad debts to increase, Emilio Pera, the lead banking director at Ernst & Young, said yesterday.
Pera said rising inflation left households with less "discretionary income" to service existing debt.
"This double knock results in revenue growth pressures at these banks at the same time that expenses are generally pressured upwards through increasing bad debt costs."
He made these comments after the release of the Ernst & Young Bank index, compiled in collaboration with the Bureau for Economic Research in Stellenbosch. The index shows that banking confidence has fallen from 79 points in the first quarter to 68 points.
Pera told Business Report that the survey had looked at 28 retail banks, including Absa, Standard Bank, First National Bank (FNB) and Nedbank, and11 investment banks.
The drop in confidence was attributable to the retail banking sector, which had declined more sharply in the second quarter than in the first quarter: from 78 to 57 index points.
Pera could not give specific figures on revenue pressures, saying the survey looked only at the trends in the bank sector.
Financial services companies, including the big four banks, have recently indicated that they would soon undertake rigorous "cost management" exercises.
Some companies said that they would do this by retrenching staff and halting the hiring of new employees.
Pera said growth in bad debt provisions at retail banks had hit an all-time high. All banks indicated that their provisions had increased in the past year.
Bank shares have not done well this year. Absa, the biggest local bank, fell 22.5 percent from the start of the year to R86 at yesterday's close, said Independent Securities.
Standard Bank, Africa's biggest bank by assets, has sagged 22.9 percent, closing at R77.20 yesterday. FirstRand, FNB's parent, has lost 31.7 percent to R13.48. Nedcor, the fourth-biggest local bank, has fallen most, by 33.9 percent, to R89.90. All four shares rose more than 2 percent on the JSE yesterday.
Steve Meintjes, a senior analyst at Imara SP Reid, said rising bad debts would continue for another six months at best and 12 months at worst. Business Watch, page 2
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