As higher interest rates place added financial strain on consumers.
Big four bank Absa expects to report an increase in credit impairment charges for the first half of the year to the end of June, as consumers faced mounting pressure from a rapid rise in interest rates.
Absa is the latest among its banking peers to flag the dire credit cycle South African consumers find themselves in, which is forcing lenders to up their provisions to cushion against bad debt.
“With South African consumers under pressure due to significantly higher interest rates, credit impairments are expected to increase substantially,” Absa said in a trading update on Friday.
It noted the increase would likely result in a credit loss ratio of between 1.25% and 1.3%.
“Consequently, our return on equity for the period is likely to be slightly below 17%,” Absa said.
Since the South African Reserve Bank launched its combative fight against stubborn inflation, the repo rate has increased by a cumulative 475 basis points, pushing up the cost of financing debt for consumers.
While rising interest rates have put pressure on consumers, banks have benefitted, evidenced in healthy income earned from interest.
Absa said in its latest update that it expects interest income to grow by mid-teen digits, year-on-year, which has largely boosted group revenue, resulting in a ‘low teens’ increase.
The group also noted that it expects low single-digit growth in headline earnings per share.
Absa will report its interim results to end June on 14 August.
Absa, Nedbank and Standard Bank share prices