A change in the banking landscape in South Africa has seen the banks shift from focusing on interest income to non-interest income, with a strong focus on unsecured lending over the past couple of years. However, cracks are starting to show in the unsecured lending arena due to an increase in bad debt and a slowdown in consumer household spending, which will put further strain on the banking and commercial property sector.
This is according to Gary Palmer, CEO of Paragon Lending Solutions, who says that the trend over the past four years has seen the banks make a push into more profitable non-interest income due to not making sufficient earnings from traditional mortgage bonds. “A decrease in interest rates, and the implementation of new lending regulations, such as Basel III, caused local banks to focus on more profitable non-interest income with increased involvement in the recovery process, which is why there has been a sharp decline in mortgage lending and a boom in unsecured credit.”
However, he says that the future is uncertain about what the banks attitude towards lending will be as uncertainty is starting to show. ”Bad debts are starting to hit the unsecured market as South Africa’s biggest lender, African Bank, reported a 26% drop in first-half profit in April resulting in a sharp decline in its share price. This may have a ripple effect on other unsecured lenders”
Palmer adds that although the Reserve Bank says that the level of unsecured lending doesn’t pose a risk to the banking system as a whole, distressed borrowing and defaulting on loans is occurring.
“The SARB’s supervision report 2012 illustrated that unsecured lending grew by 24.4% to R453 billion in March 2013 from R364 billion a year earlier, while the rate of growth had begun to slow since it peaked in November 2012.”
“However, job loss data from Stats SA in Q4 2012 and Q1 2013 supports the trend that consumer loan impairments are escalating. Households have less disposable income and are under pressure to meet monthly expenditure due to rising costs of living and are borrowing more to pay off their debt, while others are defaulting on these debts altogether.”
He says that these could be worrying times for the banking sector and property investors who will have difficulty in obtaining funding, while commercial property owners will need to focus on rent collections from their tenants. ”Commercial retail property owners will need to be prepared as retail sales will slow down as consumers cut back on spending, which will negatively affect retail tenants.”
However, he says there is still huge demand for income generating properties, especially from blue chip tenants because of the limited demand for vacant land and difficulties in obtaining finance for new developments. “Listed property has performed well, while South African real estate has remained stable and near historic highs,” says Palmer.
Palmer says that a number of investors and developers are keen to expand their businesses and get into the commercial property market but they do not have the purchase price in cash and are in need of a loan but can’t obtain it from the banks quick enough.
“When it comes to commercial property, 40% of the purchase price must be raised by the borrower, with the remaining 60% being loaned by a financial institution. Unless they are financially strong, investors and property owners are often unable to come up with the required 40% deposit.”
With businesses looking to expand or refurbish existing properties, a gap in the property market has allowed for new lenders to fill the void. “Private non-bank lenders are providing smaller businesses with the financial breathing space to grow their operations in anticipation of their bank loan.
“Non-bank lenders offer quick turnaround times to clients as they work closely with the banks, brokers and mortgage originators, so it is important during this time that clients are aware of alternative temporary funding facilities,” concludes Palmer.