John Vaughan (Financial Advisor) @ Lucid Living
Fitch Ratings says it expects that elevated levels of consumer indebtedness may prolong the recovery of the asset quality of SA’s major banks. “To minimise the impact of these delays, certain banks have proactively used loan restructuring and in certain instances have sought to terminate the debt counselling process,” said Denzil de Bie, a director in Fitch’s financial institutions team.
The ratings agency said on Friday that high consumer indebtedness and the difficult operating environment had led to an increase in the number of consumers applying for debt counselling in terms of the National Credit Act’s debt review process.
Fitch estimates the value of debt counselling exposures of the four major banks at 21 billion rand during 2010, which accounted for between 14% and 18% of the banks’ non-performing loans.
The National Credit Regulator estimated that 200,000 debt counselling applications had been received by December 31 2010, with between 7,000 and 8,000 new applications received per month.
Unforeseen delays in the debt counselling process have hampered banks’ recovery of debt counselling exposures.
“However, a recent high court ruling on credit providers’ right to terminate the debt counselling process and a moratorium until end-June 2011 may further delay banks’ collection efforts and negatively affect collateral values.”
Fitch said it believed the delays in the recovery process may cause the asset quality indicators of SA’s major banks to remain at elevated levels.
Although consumers’ ability to service debt had improved in the low interest rate environment, Fitch considered that high debt/disposable income levels and subdued economic activity may only result in a gradual deleveraging of South African consumers.
In this context, earnings growth of SA’s major banks could be constrained by weaker revenue streams and muted loan growth as consumers remain reluctant to take on new debt.