THE tremendous growth in unsecured lending is partly a result of a shift in lending from home loans into personal loans by the big four banks.
Their latest results all make this shift in "business mix" abundantly clear. FirstRand revealed last week that personal loans, including the unsecured loans made by First National Bank (FNB) and WesBank, now account for 10% of its earnings. Home loans account for just 5%.
Of the FNB loan book, the proportion accounted for by home loans has fallen from 58% to 54% in a year, while unsecured loans has grown from 6.5% to 7%, though this rate of growth is far lower than a year ago.
The reason is easy to see: unsecured lending is vastly more profitable than home loan lending. For FirstRand the average margin earned on unsecured loans is 17.99% while its margins on mortgages is just 1.46%. FirstRand is not unique in this. Nedbank earns 14.1% from unsecured loans and 1.7% from home loans; Absa earns 13.5% and 1.9%; Standard does not disclose its margin breakdown, but you can be sure its numbers are in the same territory.
Of course, those are the margins earned before credit impairments, and naturally the impairments on personal loans are much higher. FirstRand has a credit loss ratio of 9.7% on unsecured loans but just 0.32% on home loans. But that has not damaged the relative profitability of unsecured lending too much. Profitability is also not the only thing that matters.
Thanks to the implementation of the Basel 3 capital accord, banks are being driven to shorten the term of their lending books, shifting from 20-year loans to short-term loans.
This lack of appetite for home loans is clear across the industry. According to June data, there is R840bn worth of home loans in SA, just 1.4% more than a year ago. Over the same period, total assets in the banking system have grown 7.8%, with unsecured loans the largest growth area.
What does this shift mean for the country? Anecdotally, the trend need not mean fewer homes are being financed. Some of the unsecured lending is being used to finance deposits on homes, with banks only willing to fund at lower loan-to-value ratios. So the flat growth in mortgage finance does not mean that total property finance is flat, as some unsecured loans are being used for this.
The 110% bond commonly granted in the years up to 2008 is gone for good. Now banks will lend at, say, 80% of the value of a home with the borrower using an unsecured loan to make up the rest. That has been supported by a large shift in the size of unsecured loans from sub-R10,000 amounts to figures 10 times that.
Terms have also lengthened out to two to three years from a few months. But this means the cost of home finance has gone up. Instead of that 110% loan at prime or even less, as was typical back in 2008, borrowers now finance their homes through two routes that are both more expensive.
Home loans are now routinely issued at a premium to prime, while unsecured loans can cost up to 32% per year. A 100% home loan at prime less one percentage point for a R500,000 house used to cost R4,027 a month. Now, an 80% home loan at prime plus one percentage point, with the balanced funded by a three-year 32% personal loan, will cost R8,140 a month, twice the amount.
That means the property market is not too frothy and potential buyers have less ability to finance houses than they used to.
The Absa House Price Index shows that since 2008 property prices have bounced around zero growth after a few years of strong growth before then. At the same time average salaries have increased, so the only explanation is that finance costs are holding back demand for houses.
One could take a positive view on this trend in that banks are making sure their property financing is much more secure than before. The low loan-to-value ratios will mean lower credit losses on mortgages. However, this will be made up for by higher losses on unsecured loans.
I see more of a dark cloud to this silver lining. The shift has damaged the ability of the average South African to own a home. This entrenches an economic advantage for those who already own their homes, making it more difficult to transform the patterns of ownership in the economy.
While there has been a boom in the size of the black middle class, the simultaneous shift in banking behaviour means this has not translated into a proportional greater ability for black consumers to buy property.
BY STUART THEOBALD
STUART THEOBALD studied at Rhodes university
Article Source: Business day