Unsecured lenders ring alarm bells

Shares in unsecured lending companies have dropped sharply as consumer struggle to pay their debts. Image: David Castillo Dominici Free Digital Photos

Investors punished JD Group, the owner of Joshua Doore‚ Barnetts‚ Russells and Hi-Fi Corporation stores after the company advised that it expected to report a headline loss of up to 62c per share‚ as a result of the deteriorating credit quality in both the secured and unsecured lending market.

Similar sentiments were echoed by sector peer Lewis at the end of January‚ when it said that forthcoming sales would register a decline because of a 30% rise in debtor costs.

Although tighter credit controls were behind the lower sales reported by African Bank's subsidiary Ellerines in its most recent trading update‚ the microlender projected a gloomy outlook for its retail unit in the first half of this year.

Earnings were expected to be lower as a result of the ongoing challenges facing its customers‚ which included high indebtedness‚ rising food and transport costs‚ and slow income growth.

Sharp drop in share prices

"All the unsecured lenders are taking a beating. In 2007 JD Group traded at R106‚ it's now at R24. African Bank traded at around R40 in 2012‚ the share is now below R10. Lewis hit a high in 2011 at R89‚ but has now fallen to R55‚" Momentum Asset Management's Wayne McCurrie said.

Lewis‚ which is SA's single-largest furniture brand said in a trading update last month that labour instability across many sectors during the nine months to December had affected both the group's sales and collections.

Figures from the National Association of Automobile Manufacturers of SA show the automotive strike cost the industry R20bn in lost production and millions in lost wages last year.

Moreover, an 11-week strike at platinum miner Northam cost the company R200m in lost revenue‚ with workers estimated to have foregone R30m in wages.

"SA's top three platinum producers‚ Anglo American‚ Impala Platinum and Lonmin estimate the ongoing Association of Mineworkers and Construction Union strike‚ which began on 23 January‚ has cost the industry about R2bn. Employees have forfeited R900m in wages and benefits‚" Absa Capital wrote in a note.

Adding to the effects that strike action is having on consumers who fall in the lower income earning group‚ has been the slowdown in government wages and grants.

According to McCurrie the slump in retail share valuations has‚ however‚ not been limited to unsecured lenders. Those in the secured lending sector have also seen share prices fall by between 20% and 30%.

A weaker rand and rising commodity prices are providing a buffer for listed mining companies despite their direct exposure to the labour unrest in the sectors. They have been the biggest gainers on the JSE since the beginning of the year.