Cycle of interest rate hikes could see bad debts soar

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Nedbank Group CEO Mike Brown said yesterday that a 50 basis point hike in interest rates could be "marginally positive for bank earnings as the income banks earn on their own capital will increase".

A 50 basis point hike in rates might result in a small increase in bad debt, but this would be less than the income growth resulting from the rate increase, he said. "But if this is the start of a cycle of several interest rate increases in short succession, then the income benefits could be offset by increased bad debts."

The large banks are in closed periods so could not comment directly on the effect of rate hikes on their businesses. But Barclays Africa Group deputy CEO David Hodnett said: "The current rate hike is not expected to have a significant impact on the bank in the short term. However, we have been consistent in saying that a large number of consumers in SA are under pressure and is the reason we have not focused on growing our personal loans over the past two years. The rate hike is expected to further impact the affordability of these consumers."

First National Bank said it was concerned about "the additional pressure that any rate increase places on the consumer".

"One may anticipate that households would tighten their budget expenditure, however sustained hiking of interest rates has historically led to a rise in non-performing loans and bad debt levels," it said.

Banks took a knock following the surprise interest rate hike, with African Bank giving up almost 4.7% on Wednesday. The sell-off continued yesterday and retail counters were not left unscathed.

Shares of SA's retailers have had a stellar run over the past few years, becoming the flavour du jour for foreign players in search of higher yields. But since the middle of last year disappointing economic growth figures, a falling rand and slower-than-expected growth from retailers began to signal the end of the retail rush, as well as the seemingly insatiable appetite of foreign investors.

Following disappointing Christmas trading updates, the rise in interest rates has seemingly sounded the death knell for retail stocks.

Investec Asset Management head of equity dealing for emerging markets Ryan Wibberley said the repo rate increase was not great for the South African consumer, who is already under pressure.

"The consumer is the driver of retail shares. A 50 basis point hike is perhaps a small start, but a signal that the cycle has ended and the low rate environment is over and we could see several further hikes in this cycle and its just going to put pressure on an already tight consumer," Wibberley said.

Source: Business Day