Some customers more equal than others

Some home loan clients back in favour - Absa reporterI; it's getting a little easier to borrow money - banks' latest.

About one in two South Africans are unable to service their debts and at least one in five public servants have a garnishee order to his or her name - yet some banks are slowly re-opening the credit gates. But it's selective: Absa has revealed this week that it is being more generous to certain customers, while FNB is focusing on those who will help it shed distressed home loan clients from its books.

Banks have been criticised in recent months for stringent credit criteria that have put a lid on property sales and generally contributed to the tougher economic conditions for consumers and consumer-related businesses in general. 

The higher loan-to-value ratios and other criteria have worked against repeated interest rate cuts since December. Instead of asset prices and volumes rising as interest rates have dropped, market conditions have continued to deteriorate.

Banks have been turning down loan applications in their droves after being stung by easy credit handed out before the implementation of the National Credit Act and the global financial crisis. However, there are signs that banks are easing up a little and some are acknowledging that customers should be treated more selectively and qualify as good debtors.

Speaking on the SAfm Update with Moneyweb this week, Absa's chief executive officer Maria Ramos told Moneyweb's editor-in-chief Alec Hogg that her bank understands it has to be "responsible lenders too". As a result, it has eased credit criteria "on a case-by-case basis".  She said Absa shareholders "need to know that what we are doing is we are completely focused on sustainability of earnings and on holding the health of the balance sheet together". The "quality of credit is an important component of that", said Ramos.

Absa is easing up on its credit criteria against the backdrop of an ugly bad debt picture. Its credit impairments - effectively money it hopes to get back, but might not and hasn't written it off yet - are up more than 120%.

And, things are expected to get worse for commercial and retail customers before they get better for Absa. Said Ramos: "We expect on the retail side impairments to peak in the last quarter of this year - so in the second half of the year - and in the commercial banking environment impairments to peak in the first half of next year."

Ramos said there has been less lending since the end of last year, not just because credit criteria are more stringent but because there has been less demand for mortgage finance. She told Hogg: "Not that many people are applying for loans, and that again is a reflection of where the economic cycle is. This is the first recession in South Africa for over 17 years, so we are not seeing as many applications for credit across the board, certainly not seeing as many people coming in and applying for mortgages, for example, or for loans to buy motor vehicles."

FNB revealed recently that it too has been making it easier for certain clients to obtain mortgage finance for property deals. Like Absa the bank is being selective. For FNB, much of the focus is on shedding troublesome home loan clients by offering favourable terms to those who buy these properties.

FNB Home Loans said earlier this week, when releasing a report on the FNB House Price Index for July: "We are starting to see some improvement in the home loan arrears situation, while also experiencing a mild increase in transaction volumes in recent months."

Since June, FNB has offered up to 100% bonds for properties in possession and on its Quick Sell Plan, which it has allowed estate agents to get in on the distressed property sale action. Jan Kleynhans, chief executive officer of FNB Home Loans, told Realestateweb - part of the Moneyweb group - that the bank's loan to value criteria, an aspect of lending policy, was reviewed from 85-90% to a maximum of 95% for new customers.

The percentage varies with each home loan depending on factors including customer credit rating, area rating, outlook of the property and affordability and these factors have led to loan-to-values averaging 80% in the past six months on new home loans, said Kleynhans.

Article by: Real Estate Web