Coverage: weekly note · Information to 30 September 2024
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TGB Weekly Research Note · 30 September 2024
Stage 3 ratios on personal loans rose at Absa, Nedbank and FirstRand between June 2023 and June 2024, but credit loss ratios split: they fell at Absa and Nedbank, which cut back personal loan origination, and rose at FirstRand, which kept growing its unsecured book.
The desk view
South Africa's large banks reported a common pattern in unsecured lending in their results to June 2024: the stock of non-performing loans kept rising relative to the book, while the cost of new impairments diverged by strategy. Nedbank's personal loan stage 3 ratio rose to 27.1% from 24.5%, and Absa's personal loans stage 3 balance rose to R5,796m from R5,138m. Both banks cut back personal loan origination, and their personal loan credit loss ratios fell, to 8.08% at Nedbank and 9.41% at Absa. FirstRand, which kept growing unsecured advances, reported unsecured NPLs up 22% and an unsecured credit loss ratio of 7.79%, from 6.13%. Nedbank described household finances as having deteriorated further. Our view is that falling impairment charges reflect tighter lending more than healthier borrowers, and that debt counselling flows are the variable to watch.
A pressured household sector
Nedbank's interim results described household finances as having deteriorated further, with real personal disposable income declining for the fourth consecutive quarter in Q1 2024, by 0.6% year on year. Nedbank also noted that household loans and advances growth had eased to 3% year on year in May 2024. Absa reported a significant increase in flows into debt counselling, which it attributed to the financial strain on consumers from rising prices and interest rates. FirstRand said consumer strain remained elevated and would only start to moderate as the rate environment eases.
Relief arrived only after the period closed. On 19 September 2024 the South African Reserve Bank (SARB) cut the policy rate by 25 basis points to 8%, effective 20 September, with headline inflation at 4.4% in August 2024. The SARB also expected extra spending from withdrawals under the new Two-Pot retirement system, but said some of those funds would be absorbed by debt repayments and tax.
Stage 3 ratios rose across the unsecured books
One measure of asset quality is the share of each unsecured book in stage 3. At Nedbank, stage 3 loans were 27.1% of personal loans at June 2024, against 24.5% a year earlier and 26.2% at December 2023; card rose to 14.7% from 13.7%. The rand value of Nedbank's personal loan stage 3 balances was broadly flat, at R6,759m against R6,773m, while total personal loan advances fell to R24,934m from R27,686m. The ratio rose because the book shrank while the stock of bad loans held steady.
At Absa, gross stage 3 personal loans rose to R5,796m at 30 June 2024 from R5,138m a year earlier, an increase of R658m. That puts the stage 3 share of the gross personal loan book at 21.6%, against 19.4% a year earlier. Absa's card stage 3 share was little changed, at 15.0% against 15.1%, although its card stage 3 balance rose to R8,799m from R8,291m.
FirstRand, whose financial year ends in June, reported that SA retail unsecured stage 3 loans rose 22% to R15,256m at 30 June 2024, or 14.96% of core lending advances against 13.24%. FNB card NPLs rose 29% and personal loan NPLs 19%, taking their ratios to 12.65% and 16.91%.
Unsecured stage 3 and credit loss ratios, June 2023 and June 2024, %
| Bank and book | Stage 3, 2023 | Stage 3, 2024 | CLR, 2023 | CLR, 2024 |
|---|---|---|---|---|
| Absa personal loans | 19.4 | 21.6 | 11.72 | 9.41 |
| Absa card | 15.1 | 15.0 | 8.79 | 8.34 |
| Nedbank personal loans | 24.5 | 27.1 | 11.06 | 8.08 |
| Nedbank card | 13.7 | 14.7 | 7.94 | 5.16 |
| FirstRand personal loans | 15.07 | 16.91 | 7.63 | 9.32 |
| FirstRand card | 10.92 | 12.65 | 4.33 | 5.75 |
Source: Absa Group Limited, Financial results for the interim reporting period ended 30 June 2024 (results booklet), 19 August 2024; Nedbank Group Limited, Unaudited interim results for the 6 months ended 30 June 2024 (results booklet), 6 August 2024; FirstRand Limited, Analysis of financial results for the year ended 30 June 2024, 12 September 2024.
Impairment charges split on origination strategy
Absa and Nedbank cut back personal lending, and their personal loan credit loss ratios fell. Absa's personal loan production contracted 14% after credit risk management measures, and Personal Loans credit impairments fell 15% to R1,292m, giving a credit loss ratio of 9.41% from 11.72%. Nedbank said it deliberately slowed unsecured growth, and its personal loans market share fell to 10.6% from 11.2%; its personal loans credit loss ratio fell to 8.08% from 11.06%. Standard Bank's Personal & Private Banking credit impairment charges fell to R5,983m in 1H24 from R6,185m, a credit loss ratio of 170 bps against 179 bps; it attributed the decrease to a slowdown in early arrears and NPLs on slower asset growth and customer assistance programmes.
FirstRand took the other path. Its SA retail unsecured advances grew 8% to R101,974m, and the unsecured impairment charge rose 37% to R7,654m, a credit loss ratio of 7.79% against 6.13%. FirstRand attributed higher retail NPLs to origination strain from book growth, a noticeable increase in debt counselling restructures, and inflation and interest rate pressure.
The two strategies converge on one point: the late-stage book is not clearing. In Absa's Everyday Banking unit, early-stage delinquencies improved while late-stage delinquencies remained elevated, with increased flows into debt counselling. Stage 3 loans in Nedbank's retail and business banking unit still increased by R1bn in H1 2024, down from R6bn in H1 2023.
Debt counselling is the swing factor
FirstRand said debt review providers had become more active, targeting higher-income customers not in debt distress. It warned that this could lead to structurally higher default rates with a lower loss given default. That suggests stage 3 ratios in unsecured books may stay high even as rate cuts ease affordability, because restructured accounts can remain in default while generating lower losses. Standard Bank expected its credit charges to peak in 1H24, driven by ongoing strain in Personal & Private Banking.
For investors, the falling credit loss ratios at Absa and Nedbank were achieved partly by shrinking or slowing unsecured books rather than by an improvement in borrowers' finances. The test for the second half is whether the September rate cut slows debt counselling inflows enough for banks to resume unsecured growth without reversing the improvement in charges.
What to watch
- 21 November 2024: next SARB Monetary Policy Committee statement
Primary sources: Absa Group Limited, Financial results for the interim reporting period ended 30 June 2024 (results booklet), 19 August 2024; Nedbank Group Limited, Unaudited interim results for the 6 months ended 30 June 2024 (results booklet), 6 August 2024; FirstRand Limited, Analysis of financial results for the year ended 30 June 2024, 12 September 2024; South African Reserve Bank, Statement of the Monetary Policy Committee, September 2024, 19 September 2024; FirstRand Limited, Audited summary consolidated financial results for the year ended 30 June 2024 (SENS announcement), 12 September 2024; Standard Bank Group, 2024 interim results presentation (1H24 financial results presentation), 15 August 2024.