Standard Bank, South Africa’s largest lender by assets, has reported a nearly 50% increase in credit impairment charges in the first five months of this year compared to the same period in 2022. The bank attributes this increase to the increasing pressure on consumers as a result of the country’s deteriorating economy, sticky inflation, and higher interest rates.
Standard Bank stated in a voluntary trading update released on Tuesday that credit impairments in consumer banking are currently at an elevated level, with clients with home loans being the most affected. The combination of higher interest rates and an inflationary environment has made it difficult for some clients to meet their debt obligations. However, the bank notes that, while the credit loss ratio for consumer banking clients is higher than the target range of 100 to 150 basis points, it is still manageable, and coverage levels for this business segment are high.
Furthermore, credit impairments have increased in the bank’s business and commercial banking units, owing to an increase in new non-performing loans. This increase in bad loan provisions highlights the financial stress that South African consumers are experiencing.
By raising the repo rate, the South African Reserve Bank (Sarb) has been actively combating sticky inflation. The Sarb has implemented a total 125 basis point increase since the beginning of 2023, with successive 50 basis point increases in its last two meetings. As a result, the current repo rate stands at 8.25%. Standard Bank anticipates another 25 basis point increase in the second half of the year, adding to the burden faced by consumers who now face higher costs when repaying their debts.
Higher interest rates benefit banks’ top-line earnings in general, but they also raise the cost of debt, putting additional strain on financially constrained consumers. According to Standard Bank’s trading statement for the six months ending in June, profit will increase by more than 20%, owing to the positive impact of higher interest rates. The bank anticipates a more than 20% increase in headline earnings per share (Heps) during this period, owing to higher-than-expected average interest rates across its markets and balanced growth in its balance sheet. Increased transactional volumes, fee and commission income, and trading revenue all contributed to non-interest income growth.
Standard Bank maintains an optimistic outlook, expressing confidence in achieving strong positive jaws and an increase in the group’s credit loss ratio towards the upper end of the target range of 70 to 100 basis points. Furthermore, the bank expects its return on equity (ROE) for 2023 to remain within the target range of 17% to 20%.