- Says credit risk in retail low because it is dominated by govt schemes
- Absa has experienced “aggressive” spike in personal loans
While its top competitor cautioned about muted retail credit growth, Absa Bank Botswana says it is certain on growth of this particular portfolio. The bank, led by MD Keabetswe Pheko-Moshagane, has shaken off fears of job losses projected by economists after the State of Public Emergency (SOE), citing low risk profile for its customers.
The MD was quick to comfort observers during the group’s results presentation last week, arguing that Absa’s retail lending book is dominated by government schemes. “We have the view that when you look at the credit risk around that sector, it’s currently at a low level,” she responded to a question from the floor seeking to establish the quality of Absa’s retail lending book which has performed ahead of the market.
The bank’s customer loans grew by 9 percent year-on-year to P14.8 billion, after seeing increased momentum in loan conversion rates in Retail and combined with Business Banking. As the MD pointed out, retail growth was driven by scheme loans, mortgage loans and Enterprise Supply-chain Development (ESD) loans for Business Banking.
As the end of the SOE approaches, there have been fears of looming job losses which could potentially impact on the bank’s retail portfolio. Putting this anxiety to rest, Pheko-Moshagane pointed out: “We’ve got various strategies, such as retrenchment covers, that we have for our different products that we believe will minimise or mitigate the risks with the retrenchment posed.” She emphasised that Absa has always had a very solid collection strategy, which helped the bank’s expected credit losses decrease significantly by 74 percent.
Before COVID, the bank came from a very low base where it had to increase provisions to 600 percent. Absa believes this is a testament that it has a very solid credit risk model or credit rating model used to determine where it lends and where it should not.
What Pheko-Moshagane foresees into the future is that the household portfolio lending will continue to grow, hence there will still be demand on that side for its assets. A fortnight ago, the bank’s competitor also revealed that it saw pockets of opportunities on the corporate front as opposed to the retail side. This was against the background of resumption of projects shelved due to the uncertainty over the impact of COVID-19 on the economy.
Absa cautioned that its corporate portfolio will still continue to be muted going into H1 of 2022. Pheko-Moshagane said the bank has not seen a lot of asset conversion in that segment compared to both Retail and Business Banking. But while the household debt market saw improved performance, it has been a bit of a mixed bag. The bank revealed that some of the products that are probably long-term in nature were not active.
Absa saw mostly personal loans being a bit aggressive, perhaps talking to consumer patterns. It is management’s view that the behaviours were probably motivated by some of the customers trying to align themselves with the needs and opportunities that are coming up in the market, with a handful of customers coming forward to take advantage of unsecured debt. Key assumption which drove the bank’s lending strategy was consumer needs and aligning them with sustainable lending, Absa said.
On the Business Banking front, a key factor was that government has been pushing forward some of the initiatives to allow most of the SMEs and small commercials to play. Against this background, Absa said it witnessed some taking up credit to take advantage, especially for capex and machinery.
What pleases management is the sectors the bank chose to focus on which they believe are moderately affected by COVID. Management observed that these sectors are recovering “very well” and as they move forward, that is the key determining factor in terms of where Absa lends.
The bank’s non-performing loans showed an improvement. As at December, the bank was sitting at 4.3 percent, which reduced to 4.2 percent in the current reporting period. The coverage ratio is almost stable but on an improving trend. As of June 2020, Absa reported a ratio of 1.45 moving to 1.55 currently.
Last year this time, the bank had a sizable amount of its book under payment holiday and restructuring. It said this book has been weaned of that programme and has continued to perform quite pleasingly to this point. According to the bank’s estimates, almost 70 percent of that book is now operating under normal lending criteria and terms without any moratorium or any restrictions. The balance, in terms of number of accounts and number of customers are still currently being assisted to grow through. The bank revealed that these names are concentrated on a few highly impacted sectors that have been affected more by COVID-19 protocols than the rest, mostly around tourism names.
This is the sector that, in the bank’s view, and probably consistent with implications of COVID, was the mostly impacted. For as long as there are ongoing restrictions to try to contain the pandemic, the bank believes this is a sensitive area that still needs its support. The book is around P440 million split between both Corporate Investment Banking and Business Banking, according to the Absa credit department.
The bank said the portfolio is still currently being managed just to see how it can be supported throughout the rest of 2021. But some of the key assumptions really rely on what will be happening in terms of the vaccine rollout and how the economy will respond going into the 2022.