Heading for a credit squeeze
South Africa's big four banks look set to confirm their status as super earners as the 2006 reporting period draws near. Absa will release its 2006 results on 20 February and has already issued a statement to indicate that earnings per share will be up by between 25% and 29%.
However, it may not be as easy for the banking giants to profit in the coming year. A number of economic challenges and regulatory constraints could derail their efforts. And the same factors could result in a credit squeeze for debt-ridden local consumers.
The major economic challenge to the banking and financial services sector comes in the form of inflation and the concomitant climb in interest rates. Reserve Bank governor Tito Mboweni showed little hesitation in raising the repo rate by 200 basis points in 2006- and looks set to deliver at least another 50 basis points in February this year.
On the regulatory front, challenges to the financial services industry come in many guises. The National Credit Act introduces a number of guidelines which will apply to loan and credit agreements issued by banks, retailers and micro loan providers.
In light of the points raised above, an analysis of the 20th quarterly Ernst & Young Financial Services Index (released on Monday, 21 January) makes for some interesting reading.
SA Banks tightening credit standards
Anton de Souza, Lead Financial Services partner at Ernst & Young says the survey reveals that "banks are not throwing caution to the wind, and are indeed aiming at responsible credit growth."
He goes on to say that "there has been speculation that some banks have aggressively extended credit to as many new clients as possible prior to the implementation of the National Credit Act. But the survey results indicate that for the most part of 2006, banks have been rather cautious in extending credit, and that is true of both retail and merchant banks."
Add to the mix that provisions for bad debt and the proportion of non-performing loans are higher, and we can expect the cautious approach to credit extension to continue in 2007. When the National Credit Act comes into full force from 1 June the major lending institutions might curtail credit even further.
SA Banks are confident about the business environment
Despite these concerns, the retail banking sector remains confident in the business outlook for the coming year. Their views tie in nicely with the latest South African Chamber of Business (SACOB) BCI number, which reached an all-time high in December 2006.
De Souza notes that "provided interest rate hikes do not dent consumer spending too sharply, the banks should be in a position to continue benefiting from strong economic growth prospects. Even regulatory costs, which have risen markedly through 2006, appear unlikely to impact too negatively."
While the banks are relatively upbeat, some consumers could be in for a more difficult time. The tightening of credit policy by banks will mean that obtaining additional credit to fund lifestyle expenses will become more difficult.
Failure to manage debt will result in interest payments eating away at disposable income, while tougher regulation might mean that second and third credit cards become a thing of the past.
The consumer would do well to make 2007 the year for getting personal finances in order.
Editor's thought:
The combination of high consumer indebtedness and rising interest rates will severely reduce the amount of cash available to consumers. Individuals who support their lavish lifestyles on credit foundations should take special care.
