Absa’s home loan bad debt charges shoot up 260%

Lending group Absa has said the first half of the year, characterised by higher interest rates and a rising cost of living, has seen more of its customers roll into arrears and fall into debt review, forcing the bank to take on heavier loan losses that pushed credit impairments up by 60%.

The bank handed out R8.3 billion in bad debt charges during the six-month period to the end of June 2023, with credit impairment charges in mortgage lending, its biggest loan book, growing the fastest.

ALSO READ: How to survive the higher interest rate

Mortgage loan credit charges more than tripled – surging by a staggering 258% to R975 million as consumers bore the brunt of the South African Reserve Bank’s most aggressive and rapid interest rate tightening spell in 15 years.

The central bank, in its bid to bring price pressure under control, has delivered a 475 basis point (bps) increase in interest rates since November 2021. Since the start of the year, the repo rate has risen by 125 bps.

Consumers taking strain

Speaking following the release of the lender’s results, group financial director Jason Quinn said the period saw higher delinquencies and arrears, sustained pressure on its legal books, and larger numbers of customers slipping into debt review processes.

As a result, the credit loss ratio for home loans increased from a low of 19bps to 65bs, Quinn said.

The pressure faced by consumers has led to a slowdown in production and applications in the home loan segment, while approval rates have also “deteriorated” – a trend prevailing across the industry, he said.

Despite 6% home loan growth to R298 billion, production dropped by 26%, Quinn said.

While the lender conceded that the credit impairment charges the bank reported are significant, group CEO of Absa Arrie Rautenbach said this was not unexpected given rising consumer distress.

“We’ve got a cohort of loans that I think are moving through the delinquency buckets, but we’ve built significant coverage for that,” said Quinn.

ALSO READ: Interest rate hike to hit landlords

Other segments

Absa also reported a 70% increase in credit card debt, rising to R2.3 billion, while personal loans and vehicle and asset finance grew bad debt charges by 51% and 14% respectively, to R1.5 billion and R1.4 billion.

The higher credit impairments have led to a higher migration to Stage 3 loans, which are non-performing loans (NPLs) whose repayments have not been honoured over a period of time. These increased 19% from a year ago and 14% since the start of 2023, Quinn said.

“As a result, NPLs increased slightly to 5.8% of total loans, from 5.3% in the prior year and last December, although it remains below 2020’s 6.3% high,” said Quinn.

ALSO READ: This is how you can weather the 2023 interest rate storm

During the period, in what Rautenbach described as a tough operating environment, Absa only managed a 2% rise in headline earnings, reaching R11.2 billion from a previous R10.9 billion in the comparative period.

Hit by impairments, headline earnings in the South African domestic market fell 17% to R7.5 billion.

Total loans and advances for the group increased 8% while income earned from interest grew 16% to R33 billion, from a prior R28.5 billion.

This article is republished from Moneyweb under a Creative Commons licence. Read the original article.