Worrying signs of renewed credit crunch

The last month hasn’t been pretty for economic performance, credit or retail sales. Everyone from Richemont to Mr Price has taken a beating.  Woolies is down about 13% in the last month.

And now both Capitec and African Bank are reporting worse default experience (respectively through temporary strike-blips or through a cyclical downwards trend) and are pulling back on credit extension.

I think I buy African Bank’s more pessimistic view than Capitec’s “blip from the strike and growth will slow”. The reality is economic growth has been very low for several years and much of the consumption over this period has been through a reinflating credit “bud”.  It’s not at bubble proportions, but when that bud starts slowing in growth the true impact of several years of poor economic and basically non-existent employment growth will be felt.

I still need to update 2013 predictions, but so far I’m not feeling particularly optimistic about being a credit retailer and certainly not enough to justify the still-high PE multiples.


Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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  1. Have a look at property price growth in the low income segment. Another ingredient to worry about.

    1. Already seen that the R150,000 to R300,000 segment of the property market has been booming. Enough to make me think whether I should be investing in lower income houses. The thing is, capital price appreciation reflects access to capital and free cash flow. I don’t think this is then the same market as the R5,000 loans, but I’m not that close to it.

  2. The stage was now set for a bubble-fueling alliance: Housing inflation (often mistaken for “wealth creation”) on the asset side of the national balance sheet was kicked into high gear by growth of the liability side of the balance sheet. At the epicenter of the mortgage industry’s growth was government-sponsored credit provision in the forms of Fannie Mae and Freddie Mac.

    1. Interesting comment, but of course Fannie Mae and Freddie Mac were not at the epicenter. That’s just not true. For many years they were far behind the subprime lending of the commercial banks and were eventually pushed into this lending as their market share declined. There’s no need to blame the “special” lenders of Fannie Mae and Freddie Mac when plain old banks, their corrupt mortgage originating brethren and risk-blind rating agencies will do just fine.

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