Consumers use costly credit to make ends meet – FirstRand

Banking group FirstRand says it has started to see a marked uptick in customers taking up unsecured credit to make ends meet as consumers bear the brunt of financial pressures brought on by South Africa’s economic conditions.

“We have seen a somewhat marked pick-up in the unsecured retail portfolios … from a bad perspective, [it’s] a sign that consumers are having to make use of more expensive credit, I guess to [meet] that household budget,” said Alan Pullinger, CEO of FirstRand, parent company of South Africa’s first bank FNB, which is its largest unit.

Pullinger was speaking at an investor briefing on Wednesday evening during which he gave an update on the company’s financial performance for the year ended 30 June 2023.

In the first half of the reporting period, the group initially saw good growth in home loans and vehicle asset financing, while unsecured lending remained muted. In the latter half, it experienced the inverse, with largely mortgage lending slowing.

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Balloon payments trend

Consumers are also extending their repayment plans in an effort to cope and the prevalence of balloon payments has grown, Pullinger said.

“Around customer affordability … we are seeing an increase in the [loan term] of financing; that is kind of stretching out. More customers are having to term-out funding for their vehicle over a longer period to make it more affordable,” he said.

FirstRand CFO Harry Kellan said while the recovery rate of missed debit orders remains healthy, it is marginally lower than the bank’s first half of the 2022/23 financial year.

FirstRand’s update is the latest to paint a bleak picture of the current state of the financial affairs of many consumers, whose spending power has been eroded by upwardly sticky inflation and the high interest rate environment.

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Cost of debt

While banks enjoy handsome earnings from the endowment effect of the central bank’s policy tightening, the cost of debt immediately shoots up, weighing on consumers’ ability to afford repayments.

Since the start of the South African Reserve Bank (Sarb) hiking cycle in November 2021, the repo rate has increased by a combined 475 basis points (bps) to 8.25% from pandemic lows of 3.5%.

This year alone, the repo rate has already increased 125bps with two significant raises at the last two monetary policy meetings.

For FirstRand, income earned from interest benefitted from both higher interest rates and continued loans growth.

“Advances growth is trending as expected in the other retail portfolios. The combination of higher rates and inflation has caused affordability pressures in certain consumer segments, which dampened demand,” it said.

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Focused lending approach

The group said it would stick to its current lending approach, which it adopted following the Covid-19 pandemic, and that it would continue focusing on low to medium-risk customers in pursuing advances growth.

“Of course, our affordability checks now take into account higher policy rates and certainly higher policy rates for longer,” Pullinger said.

“That has probably constrained what we thought would [flow] through in the first half, so I guess it’s more about adjusting the affordability checks as opposed to in any way trying to throttle the origination. We are still out there, very much, looking for advances growth,” he said.

As a result of economic activity being interrupted by higher levels of load shedding, upwardly sticky inflation, and steeper interest rates hikes than it forecast at the start of the year, FirstRand has now reduced its GDP growth forecast for 2023, expecting it to shrink 0.1%.

“There remains a strong likelihood of further rate hikes,” the company said.

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This article originally appeared on Moneyweb and was republished with permission.
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