A painless legal sop to poorer debtors

For once a piece of legislation aimed at bringing relief to the hardest hit in South Africa’s almost stagnant economy won’t cause lasting collateral damage. While it stands to end the self-defeating behaviour of low-earning consumers whose hunger extends to household trappings and clothing, it won’t hurt those who provide credit in the under-R50,000 bracket much at all. In fact, it turns the famous French phrase attributed to Marie-Antoinette (bride of France’s King Louis XVI) of ‘let them eat cake’ on its head. Instead the credit providers, be they reputable banks, retail outlets famous for aggressive extension of credit, or loan sharks, will eat less cake, proportionate to the order in which they’re cited here. This story pragmatically outlines how easily the bigger institutions will absorb these low debt write-offs, disposing one to lift one’s hat to the legislators. It’s short-lived relief however, the kind that would have served the ANC handsomely just prior to the last elections. The lending institutions will no longer extend low-level credit. And low-income consumers will be less indebted. Now to get the more privileged to cut their cloth to suit their pockets. Mute those shouts of ‘we’re already doing that!” – Chris Bateman

South African debt relief law ‘no cause for alarm’ for investors

By Adelaide Changole

(Bloomberg) – A new South African law bringing relief to over-indebted, lower-income consumers is unlikely to deal as severe a blow to banks and retailers that some investors may fear, according to Bank of America Merrill Lynch analysts.

Describing the legislation as “a bogey, but no cause for alarm,” BofAML analysts including Michael Jacks said in a note that retailers have already provisioned for the projected impact on their bad debt. Banks would typically classify debt that qualifies under the new law under impairments, mitigating its effects. Legal challenges from creditors are likely, while the national credit body will need to add operating capacity, slowing its implementation.

Retailers with higher proportions of customers using credit may feel the effects in slower growth, with the targeted income groups accounting for an average of 40% of shoppers at the Foschini Group Ltd., Truworths International Ltd., and Mr Price Group Ltd. A 5% debtors’ book write off would have a 2% negative earnings-per-share impact for Foschini and Truworths and 1% for Mr Price due to lost interest income, while damping future credit growth.

“Credit accounts for 70% of Truworths Africa sales, 45% at Foschini and 18% at Mr Price,” BofAML said, adding that “both Foschini and Truworths have already made provisions for this bill in their provisions for bad debts in their last set of results.”

Among banks, Capitec Bank Holdings Ltd. has the highest exposure to the targeted income group and one-time impairments could erase 13% of EPS and 4.7% of recurring profits. However, Capitec management has “been actively reducing exposure to affected loans and note conservative provisioning relative to write-off experience, which should temper this outcome.”

Absa Group Ltd., the second-most exposed lender, could see a one-time blow to EPS of 9.8%, while FirstRand Ltd. could lose 8.6%, Standard Bank Group Ltd. 7.4% and Nedbank Group Ltd. 6.5%. As unsecured loans account for just 8% of total unsecured advances by banks and only 1% of total bank advances, the law is likely to have a muted impact on South African economic growth, they said.