Banking: Where is the rumored consumer credit boom in South Africa?

Just posting a quick note on a novelty in SA markets. There has been much talk about the unprecedented consumer credit boom (and much feared bust) in South Africa. See for example Bloomberg’s “South Africa: Unsecured credit boom may not bust” or an older piece on Moneyweb referring to assurances from the SA Reserve Bank that the unsecured credit boom is no bubble.

The figure below illustrates the total credit card debt owed to banks operating in South Africa.

The next figure plots credit card debt owed to the top five banks separately:

And the last figure illustrates the credit card debt owed the top five banks as a ratio of their total assets:

I will leave the long story for someone else to tell, but I have a couple of comments. The first figure clearly shows that South African households and corporates do have an increasing amount of credit card debt to SA banks. Most strikingly is the sharp jump in November 2012. Prior to November 2012, we saw a healthy growth in credit card debt, though not nearly as rapid as prior to the global financial crisis. Adjusted for inflation, this growth seems rather modest and does not give much reason for concern.

Now, back to the spike in November 2012. This looks a lot more dangerous and does warrant a minor investigation. Now, the investigation is very simple: if you have paid attention to the markets recently, you would perhaps have picked up on the news that ABSA acquired Edcon’s account receivables, including all purchases made on credit at Edgars, Jet and Boardmans. This purchase is clearly reflected in the second and third figures where you will see that the entire jump in November 2012 was driven by Absa’s balance sheet. In other words, there was no jump in credit indebtedness, this was rather a move of existing credit from the balance sheet of retailers onto the balance sheet of banks. This number gives no indication of how much credit is still outstanding to the retail sector in South Africa. It does however remind us that the retail sector has become a huge player in the unsecured credit market, where the debt of one retail group makes a great impact on the total credit outstanding to South African banks.

The conclusion to draw from this is that bank balance sheets give us a surprisingly poor view of the indebtedness of the population. The purchase of Edcon’s credit receivables had a huge impact on the total credit card debt owed to banks. If there is such a thing as an unsecured credit bubble in South Africa, it is not caused by bank’s recklessness, but rather by the retail sector’s trust in its own ability to judge the consumers’ creditworthiness. Absa is now the odd bank out, with credit card debt accounting for as much as 35% of its’ total assets and 46% of its total equity.

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