Can New Financial Technology Help South African Banks Manage Rising Bad Debt?

Written by Dana Sanchez

South African banks are likely to be less profitable in 2017 amid a slow economy, increase in bad debts and rising capital costs.

However, insurers are likely to profit from new technology.

From News 24. Story by Godfrey Mutizwa



With about 1 percent South African growth forecast for next year, banks will struggle to find new customers while bad debts will rise as unemployment increases, analysts say.

“Increased cost of funding and rising impairment charges will collectively cause a profit pinch,’’ Adam Bates, EY Financial Services Africa leader, told City Press. “It is unlikely that banks will move into a loss situation but overall profits are more likely to grow at a slower pace or perhaps even shrink.’’

Rating agency Moody’s Investors Service last month warned of an increase in problem loans at South Africa’s four biggest banks over the next 18 to 24 months with non-performing loans set to increase to 4 percent by the end of 2017 from 3.2 percent in 2016. Debt provisioning will have to increase as economic growth slows, cutting return on asset ratios to 1 percent from 1.2 percent at the end of June.

The agency picked FirstRand as the best placed among the country’s four largest banks to weather the upcoming economic slowdown and resultant increase in bad debts. FirstRand and Nedbank are also rated higher for asset quality than Standard Bank and Absa, whose non-performing loans are seen higher at 3.3 percent and 3.4 percent respectively.

South Africa’s economy barely grew in the third quarter at 0.2 percent, compared with a revised 3.5 percent in the third quarter, putting it on track to grow by 0.4 percent in 2016 and 1.2 percent next year, according to the Reserve Bank. Against a population growth rate of 1.6 percent, economists say South Africans are growing poorer on a per capita basis.

The country’s biggest asset managers are struggling with a market that has tended flat in the past 18 to 24 months, said Adrian Cloete, portfolio manager at PSG Wealth. Flat revenues were also beginning to hurt margins as costs rose against a background of rising outflows because of the weaker economy.

“It’s not a train smash as they are still showing reasonable growth compared with other parts of the economy like retailers,’’ Cloete said. “But because the consumer is under pressure, flows on the retail side have not been coming.’’

While the major banks will likely avoid losses, smaller banks may struggle to attract new clients and post losses, Bates said. “It is very difficult to find new clients in a low- or no-growth environment so organic growth will be much more difficult to achieve.’’

Nomura International emerging markets economist Peter Attard Montalto said while profit growth will slow as banks struggle to roll over debt – resulting in lower advances – interest rates are unlikely to increase significantly with inflation also moderating.

“Banks remain well qualified with limited FX exposure and good provisioning in the tier 1 and tier 2 spaces,’’ Montalto said. “As such I think there are no serious financial stability threats either from the domestic cycle or the global influence from higher U.S. rates.’’

Financial regulation and the country’s institutions remain well regarded internationally and are generally seen to have contributed to saving the country from potential ratings downgrades.

In future, insurers, asset managers and the banks are likely to benefit from the innovation revolution taking place in the financial technology space – which provides distribution platforms, Bates said.

But partnerships will be key in reaching new customers, especially in the rest of the continent where insurance premiums are being built into mobile subscriptions.

“For insurers, the need to drive the distribution model and mobile platforms can fundamentally help,’’ Bates said.

“New platforms create a new means of distribution. This is especially true for insurers, who struggle across much of Africa, where the awareness of insurance and its benefits has kept demand very low.’’

New technology will also help insurers handle claims payments and better understand client behaviour, which will help them price their products for individuals rather than at market segments.

African economic growth, which before this year had driven the country’s big banks into the continent, is slowing as commodity prices stagnate and fears increase Donald Trump’s election as US president will hurt investment interest in Africa.

Read more at News 24.