When’s second unsecured lending shoe going to drop? Abil -55%; Capitec -8%.
Had a lot of fun on CNBC Africa's Power Lunch today co-hosting with Gugulethu Mfuphi. I've got Biznewz blogger Irvine Green to thank for that. A couple years back he earmarked Gugu as a rising star (Irvine "discovered" her on Radio 702) and we managed to convince her to join Moneyweb. It's been delightful watching this poised, confident young woman blossom into a professional broadcaster. CNBC spotted her, too, and earlier this month poached her from my old company. And here we were today, working together again, teasing information from the guests like in the radio days. It works just as well on TV. This interview with Geoff Miller of TransUnion left me feeling a lot better informed. As you'll read, there are two very different stories for SA finance houses right now. The home loans and instalment sales areas are OK, with bad debt write-offs are falling. But at the lower end where the unsecured lending bubble is at its zenith, it's a different tale. Interestingly, Abil shares are down 55% in the past 12 months. Capitec, however, is off only 8.5%. Miller avoided answering my question whether he'd be buy either of the stocks now – "they're clients". That response speaks volumes. – AH
ALEC HOGG: Welcome back to Power Lunch. Well, we've just been looking in the break at the Monetary Policy Committee meetings and indeed today is the finalisation of this week's meeting. We will have one more in the year, so the economists don't believe there's going to be much of a change in interest rates, but it's always good to hear what Gill Marcus, the Reserve Bank Governor has to say as she'll be talking later this afternoon. It's one of those critical pieces of information that you can understand how the economy really is working. But when you dig down a little bit deeper cash flow in South African households is deteriorating as living costs rise and a weak job market has been taking it's toll on income security. This is according to TransUnion whose Chief Executive Geoff Miller is here in the studio. To help us through your latest index… Maybe if we just move this back a little bit; you do this quarterly? It's an index which, to be below is not good, so the higher it is the better it is. It's peaked in 2010 at 63 I see from the notes, and it's now down to 43.4 so yet another decline. What, in a nutshell, is that telling us?
GEOFF MILLER: It's similar to the Kagiso PMI Index so anything below 50 means consumer credit health is declining in South Africa; above 50 means it's improving. And what we're really finding is it's the fourth straight quarter of a declining index and what we're really seeing is two things: (1) we're seeing credit defaults going up, so consumers are not able to meet their obligations to credit providers. It's up 13% in over a year. It was up 13% last quarter as well and then (2) inflationary pressures: fuel, food and all of those other things are also squeezing the consumer's wallet. Obviously the economy as a whole isn't growing very quickly so all that leads to consumers that are in distress.
GUGULETHU MFUPHI: Jeff, what would you say is the greater impact on our local economy?
GEOFF MILLER: What is the greater impact?
GUGULETHU MFUPHI: With regard to South African consumers still under pressure/unable to pay their bills.
GEOFF MILLER: Yeah, obviously the strikes haven't helped. I think the slow GDP is really hurting incomes overall. I think just as important has been the huge rise of unsecured credit over the last couple of years, so even consumers that have had jobs and had steady incomes have taken on a significant amount of debt over the last couple of years and they're finding it now very difficult to pay it.
GUGULETHU MFUPHI: You've mentioned that there's some encouraging news coming out of this, but banks have taken a little bit more of a strict approach when it comes to offering credit to South African consumers. Are we seeing evidence of this in the greater impact of this?
GEOFF MILLER: Yeah, so there's good news and bad news. So what we're seeing through our information…when a consumer applies to a bank the bank comes to us to assess that consumer's credit risk. We're still seeing a double-digit growth year-over-year. That means consumers are still extremely credit-hungry, but when we look at the number of accounts that are opened, that number's coming down. So what we are seeing is; lenders are being much more strict around who they're granting credit to. So that's the good news. The challenge is consumers that have been granted credit a year or two ago and they're still struggling to pay that debt off.
GUGULETHU MFUPHI: But are stricter controls enough? Doesn't this also have to do with mindset, particular with the guys at the lower LSN market who don't understand the impact of these credit payments?
GEOFF MILLER: Yeah, I think consumer education overall needs a lot of improvement. We did some surveys with consumers. We asked them what their interest rate was and not a single consumer could tell us what their interest rate was. They could all tell us what their repayment was. So I think there's a lack of understanding around what the cost of credit is. I think there's a problem with consumers using credit to buy discretionary products, you know, jeans or TV's or other things that perhaps they can't afford. So there's a number of factors that have really contributed to the problem – the problems that we're at right now.
ALEC HOGG: We know all of that, Geoff. We know consumers are spending money on things they shouldn't be spending on. But where there is a bit of confusion in my mind is that the banks' write-off's have been declining so what they're telling us is that the bad debt experiences that they're seeing are actually a lot better. The difference between what they're telling us and what you're telling us: is it because you're looking at different market segments?
GEOFF MILLER: Maybe. So if we look at the performance of Vehicle Asset Finance and we look at the performance of Mortgage Lending; actually that is improving, so those delinquencies are improving. Where we are seeing the delinquencies increasing is in personal loans in the micro-loans segments, so for a bank overall that's 4-6% of their portfolio so an improvement in mortgage could offset that. Also it depends on what they've provided for, right? So if they built in the cost of the product with very high delinquency rates, the delinquency rates could still be tipping up, but we'd still be okay.
ALEC HOGG: So we've really got two banking markets almost. We've got the Capitec-able market – and no wonder Mr Market is getting really upset about those shares and operations, where you're confirming there's problems.
GEOFF MILLER: There's problems.
ALEC HOGG: Whereas the other markets…maybe higher income people who've got cars etc. are actually coming out of their issues.
GEOFF MILLER: They're okay. It's not a large improvement, but it's an improvement overall. And what we are seeing…if you talk…Capitec publicly stated in Q4 of last year that they've tightened up credit policies so a lot of these banks have started tightening up their credit policies; not just recently but three or four quarters ago. So their current vintage performance is much, much better than the loans that they wrote 12 months ago/two years ago. So they're still having problems with their back-book, but their current vintages are performing much better because of tightened credit standards.
GUGULETHU MFUPHI: Geoff, but where did all of this start? As you mentioned, we're targeting two different markets here. Is it because the key focus is on the lower LSN groups or have the high earners just been a little bit more relaxed with their repayments?
GEOFF MILLER: You know [it is] difficult to make a conclusion either way, but in our view – and we don't have income on our file but we can compute income through some analytics – and what we're seeing is that it's the lower end of the market that really is under stress. The mid and the uppers that have mortgage bonds and vehicle loans; they tend to be doing okay. It's really those lower-end consumers and a lot of them have taken out… You know, they're used to 30/60/90-day credit and now they're finding themselves with repayment terms of 24 months, 36 months. Is there going to be debt fatigue? So you don't mind paying your bills if you're living in a house every month, but if you take out an unsecured credit loan, two years into it what is your appetite to continue paying it seeing that you've probably spent the money that you got upfront?
ALEC HOGG: Gugu, this reminds me of a story that we did about a year ago – if you recall – in the wake of Marikana. Some of our colleagues at that time went into the city of Johannesburg and they could get credit as though they were millionaires. They were offered a multiple of their salaries by furniture stores, by – I guess you'd call them loan sharks. So at that bottom end of the market, the chickens are now coming home to roost.
GEOFF MILLER: Yeah, and the concern is what happens next. There are consumers that are quite desperate and are unable to access credit for even their daily expenses, so what's going to happen to them? Do they go to a lender as a last resort – an unscrupulous lender? Does this kind of set them off and now they default in all their loan repayments? So it's a tricky situation. I think the banking sector is well-capitalised so I don't think it's going to be a banking sector problem. Maybe there'll be individual banks that will have more of a challenge than others. But the human interest side and the number of consumers that are significantly under debt is going to be a problem.
GUGULETHU MFUPHI: Alec, if you recall there were talks of a credit bubble or an unsecured credit bubble. Would you say that's maybe about to pop or burst anytime soon? Or are there still concerns regarding that?
GEOFF MILLER: Yeah. So I think there's been an increase of provisions by the banks. I think that they've tightened up their credit policy. As I said, the larger banks are not really that exposed to unsecure in the greater scheme of things. So once again, from a lending perspective there might be a bit of stress but I would not call it a bubble. The real impact is: what happens with consumers and how are they able to deleverage themselves and get themselves out of the hole that they've been thrown into?
ALEC HOGG: So the question for an insider – which is what you are – is would you own or buy Abil and Capitec stock?
GEOFF MILLER: Those are my customers so I can't comment specifically
ALEC HOGG: You mean you're holding piles of it. You can't go short on that.
GEOFF MILLER: No – no. But here's what I can say: consumers are in distress and I think they're going to be for some time. I don't see this fixing next quarter or the quarter after. I think consumers are going to be in a fairly pinched space for at least the next year.
ALEC HOGG: Thank you, Geoff. That was Geoff Miller, the Chief Executive of TransUnion here in South Africa.