S. Africa Banks Face Bad-Debt Readiness Test: In Five Charts

  • Rand turmoil after finance minister shock adds to rate risks
  • Country set for ratings downgrades; consumers heavily in debt

South African banks were preparing for an increase in bad debts among customers next year even before President Jacob Zuma shocked markets by suddenly removing his finance minister last week and reassigning his replacement after just four days.

The rand hasn’t fully rebounded from the record lows it plumbed following Zuma’s initially unexplained dismissal of Nhlanhla Nene on Dec. 9. The currency’s slump has added to prospects of interest rate increases in the new year, which will compound the strain on consumers already faced with a debt-to-household income ratio of 78 percent.

Bond yields also haven’t completely retraced losses after surging to seven-year highs following Zuma’s intervention, which came just days after a credit-rating downgrade and the lowering of its outlook put South Africa on the road to junk status. Lenders’ earnings may be squeezed next year as a jump in funding costs and worse-than-bargained-for bad-debt levels counter the positive effect that higher interest rates have on the income banks receive for their capital.

“Even without the Nene decision, South Africa was going to have to work twice as hard to salvage its financial reputation,” said Michael Power, strategist and money manager at Investec Asset Management, which oversees about $106 billion. “The ‘possibility of a financial crisis’ discount that the bank shares now have will not go away until there are a whole string of decisions from government suggesting that it is truly, unreservedly serious about getting the economic management of South Africa back on the right track.”

Johannesburg’s banks index has dropped 17 percent this year, and fell 1.9 percent Friday.

Below are five charts that show how Zuma’s decisions added to an already difficult picture for lenders in Africa’s most industrialized economy.

1. The banks lost billions of dollars in market value, and even Zuma’s appointment of Pravin Gordhan, known in international financial markets because of a previous term as finance minister, has yet to guide stocks back to their pre-Nene firing levels.

2. After a 2009 recession, bad debt levels at South African lenders rose. They responded by tightening credit rules and beefing up collections teams. They’ve remained cautious about who they lend to and have managed non-performing loans lower. With interest rates set to climb more than originally expected next year, bad debt levels could pick up.

3. Inflation was already forecast to breach the central bank’s 6 percent upper target in the first quarter of next year. With a weaker rand, consumer prices may move higher and for longer and the South African Reserve Bank may increase interest rates, making it harder for consumers to keep up with their payments.

4. Zuma’s flipflop on finance ministers means the cost of funding will rise. This will have less of an impact on South African banks than rising bad debt levels because on average less than one fifth of their funding comes from debt-capital markets. The banks are large, deposit-taking businesses and their capital levels will probably continue to exceed Basel III’s minimum requirements in 2016.

5. Accelerating inflation and interest rates could signal even slower growth for the moribund South African economy, which narrowly avoided a recession this year. The country’s biggest lenders have forecast a drop in earnings, which may now be steeper as bad debts eat away the profit they have generated.

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