October Copyright 2012 Eighty20. This presentation is incomplete without the accompanying oral commentary

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Morgan Wells
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Bubbles October 2012 Copyright 2012 Eighty20 This

2 2 What is a bubble? Why do we care? Asset bubble Prices of specific asset classes are over-inflated due to excess demand for the asset as an investment vehicle. Prices rise quickly over a short period of time, and are not supported by underlying demand for the product itself Investors see the trend of rising prices and buy quantities of the assets in hope of profiting from the increase in value in the coming weeks, months or years An asset bubble is also known as a financial bubble, market bubble or speculative bubble Credit bubble The amount of credit outstanding expands strongly, as those who will never be able to pay back all that they owe are granted more and more credit Often created at the same time as an asset bubble, particularly if economic growth is high at the time of the bubble. There is a positive interaction between rising asset prices, high growth, and more loans for investment or consumption Essentially, a credit bubble is an asset price bubble that is built on leverage How would we know if there was a credit bubble? Empirical observations suggest that credit bubbles are driven by a common pattern. Structural changes in financial markets induce rapid credit expansion and rising leverage that contribute to a demand expansion and the associated increase in asset prices. This run-up subsequently ends in large scale unwinding of trades, resulting in asset price collapses and a wave of defaults. In many cases, banking crises and exchange rate crises follow. The outcome of these episodes is a downturn in the real sector of the economy that lasts for several years. (Buchsteiner, H. & Zavodov, K. (2012), Bubbles in Open Economies: Theory and Empirical Detection )? Source: massline.org, useconomy.about.com,

developments closely. Unsecured lending does not currently present any systemic risk to the financial system.

3 3 Is there a bubble? Isn t there a bubble? Financial stability At current levels unsecured lending does not constitute a bubble and the Bank is monitoring developments closely. Unsecured lending does not currently present any systemic risk to the financial system. - South African Reserve Bank, Financial Stability Review, March 2012 "As a regulator we are concerned about the growth in unsecured lending. It is growing and it is growing too fast. - Lesetja Kganyago, Reserve Bank Deputy Governor

4 4 Is there a bubble? Isn t there a bubble? Impact on Financial consumption stability expenditure Fund manager Gavin Wood says he s especially bearish on retailers. He suggests that the real reasons behind the success of retailers has been the SA government by granting generous wage increases to its employees who in turn pass the benefit on to retailers and large lenders such as Capitec and African Bank which have steadily been increasing both the size and the term of their unsecured loans. - Gavin Wood, manager of Kagiso Equity Alpha Fund

5 5 Is there a bubble? Isn t there a bubble? Impact on consumers We are reasonably comfortable that the growth in this market [the unsecured credit market] does not stem predominantly from more credit being extended to the same group of (potentially overextended) customers. Unsecured credit is no longer an industry of small value, short term loans to moderate income customers. Loan sizes have increased, terms have become much longer and the strongest loan growth has been in the middle to higher income bands, traditionally the domain of the major commercial banks. - ABIL Integrated report 2011 for the year ended 30 September 2011 Our fear is that the majority of this market is already experiencing much pain and does not have room in their cash flows to allocate more toward debt repayments. The result is that much of the growth in unsecured credit is fuelled by debt spirals where the distressed customer experiencing negative cash flows is borrowing from Peter to pay Paul. - Clark Gardner, CEO of Summitfin

6 6 Agenda So is there a bubble? A closer look at the market Health check Headline stats

7 7 As at Quarter 2, 2012 total outstanding consumer credit amounted to R1.36 trillion, the vast majority of which was mortgage debt GROSS DEBTORS BOOK: 2012 Q2 R BILLIONS MORTGAGES SECURED CREDIT CREDIT FACILITIES UNSECURED CREDIT SHORT- TERM CREDIT ACCOUNTS (000 S) Source: NCR Consumer credit report

8 8 Total consumer credit has grown by 5% per annum or R247 billion since Q The unsecured category has grown most noticeably GROSS DEBTORS BOOK: 2008 Q2 R BILLIONS MORTGAGES SECURED CREDIT CREDIT FACILITIES UNSECURED CREDIT SHORT- TERM CREDIT ACCOUNTS (000 S) Source: NCR Consumer credit report

9 9 Total consumer credit has grown by 5% per annum or R247 billion since Q The unsecured category has grown most noticeably GROSS DEBTORS BOOK: Q2 R BILLIONS MORTGAGES SECURED CREDIT CREDIT FACILITIES UNSECURED CREDIT SHORT- TERM CREDIT ACCOUNTS (000 S) GROWTH FROM % 3% 4% 31% 7% FROM % 11% 9% 47% 12% AVE Y ON Y FROM % 4% 4% 32% 7% Source: NCR Consumer credit report

10 10 In fact, most other categories have declined in real terms GROSS DEBTORS BOOK: Q2 R BILLIONS MORTGAGES SECURED CREDIT CREDIT FACILITIES UNSECURED CREDIT SHORT- TERM CREDIT 872 BOOK ASSUMING NO GROWTH IN REAL TERMS BETWEEN ACTUAL Q ACCOUNTS (000 S) Source: NCR Consumer credit report Note: 'ATM loans' were reclassified from credit facilities to unsecured loans (early 2010), African Bank reclassified loans on furniture from secured to unsecured (mid 2008), NCR has started to increase the number of unsecured lenders that are incorporated into the data. This started in the second half of 2011.

11 A range of supply-side factors is shifting the market away from secured towards unsecured credit VALUE OF LOANS GRANTED R BILLIONS MORTGAGE 2008 2009 2010 2011 R143.40 48% R73.54 34% R96.

11 11 A range of supply-side factors is shifting the market away from secured towards unsecured credit VALUE OF LOANS GRANTED R BILLIONS MORTGAGE R % R % R % R % SECURED LOAN R % R % R % R % CREDIT FACILITIES R % R % R % R % R % R % R % R % UNSECURED LOAN R301.4 R215.7 R285.1 R368.0 Source: NCR Consumer credit report Note: Short term credit- 2008: R3.7 bn (1%), 2009: R3.9 bn (2%), 2010: R5.5 bn (2%), 2011: R6.66 bn (2%)

12 12 NCR data highlights a noticeable trend towards larger, longer term unsecured loans UNSECURED LOANS GRANTED BY TERM: Q Q (Billion Rands) LOAN TERM* Ave loan size 2008/ / / /12 R4 200 R5 800 R5 800 R5 200 CAGR 18 MONTHS OR LESS % Ave loan size MONTHS Ave loan size MONTHS Ave loan size 3.1 YEARS 5 YEARS R8 500 R9 300 R R R R R R R R R R % 23% 80% Ave loan size 5.1 YEARS OR MORE R R R R % Source: NCR

13 13 Agenda So is there a bubble? A closer look at the market Health check Headline stats

According to credit bureaus there are almost 19.5 million credit active South Africans.

employment as evidence of a bubble 14 POTENTIALLY CREDIT ACTIVE MARKET 16.

3 million Pensioners: 50% are credit active 1.5 million Domestic workers earning R1200 or more 0.

5 million Informal sector workers earning R1200 or more 1.

Pensioners: If not economically active, and 60 years old or more, and answered pension to the question

14 According to credit bureaus there are almost 19.5 million credit active South Africans. Some analysts have highlighted the discrepancy between this number and the number who are in formal employment as evidence of a bubble 14 POTENTIALLY CREDIT ACTIVE MARKET 16.7 MILLION Homemaker with a formally employed spouse 1.1 million Employed in formal sector 10.3 million Pensioners: 50% are credit active 1.5 million Domestic workers earning R1200 or more 0.6 million Recent job losers (in the past year): Assumed 75% were credit active 1.5 million Informal sector workers earning R1200 or more 1.7 million Source: QLFS Q4 2011, LFS Q3 2007, Stats SA Monthly Earnings of South Africans Note: Pensioners: If not economically active, and 60 years old or more, and answered pension to the question how do you support yourself? ***An analysis of LFS 2007 Q3 indicated that 44.4% of homemakers had a formally employed partner. This proportion of homemakers was carried through to 2011 to estimate the number of homemakers with a formally employed partner

15 15 According to XDS there are around 15 million consumers who have open credit accounts 9.3 CREDIT CONSUMERS (July 2012, Millions) Retail apparel Micro loan Credit card Retail furniture Other * Personal loan Mortgage Asset finance Source: XDS data * Other includes Retail General or Financial Other

16 16 Introducing the income-earning population pyramid. A total of 23.6 million adults earn an income 2011 PERSONAL INCOME R ADULTS 18+ (000 s) 408 R R R R R3 500-R R1-R Source: Amps 2011, Eighty20 analysis to determine imputed income where data is missing, XDS Note: Adults with no personal income:

17 17 In total around 60% of adults who have a personal income have at least one formal credit product as recorded by bureaus PERSONAL INCOME R CREDIT ACTIVE 100% ADULTS 18+ (000 s) 408 R R % R R % R3 500-R % R1-R % Source: Amps 2011, XDS Note: Adults with no personal income:

18 18 Of course, product penetration through the pyramid differs significantly for various products PERSONAL INCOME R MORTGAGE 77% ADULTS 18+ (000 s) 408 R R % R R % R3 500-R % R1-R % Source: Amps 2011, XDS Note: Adults with no personal income:

19 19 Penetration of secured loans is lower than mortgages in every segment PERSONAL INCOME R SECURED LOAN 65% ADULTS 18+ (000 s) 408 R R % R R % R3 500-R % R1-R % Source: Amps 2011, XDS Note: Adults with no personal income:

20 Credit card penetration is effectively at saturation point in the highest income segment and reaches a sizeable minority of lower income earners who earn less than R per month 20 PERSONAL INCOME R CREDIT CARD 97% ADULTS 18+ (000 s) 408 R R % R R % R3 500-R % R1-R % Source: Amps 2011, XDS Note: Adults with no personal income:

21 21 Almost 70% of those earning between R3 500 and R per month have an account at a clothing retailer PERSONAL INCOME R RETAIL APPAREL 39% ADULTS 18+ (000 s) 408 R R % R R % R3 500-R % R1-R % Source: Amps 2011, XDS Note: Adults with no personal income:

22 22 Penetration of furniture accounts is highest in the lower income market PERSONAL INCOME R RETAIL FURNITURE 3% ADULTS 18+ (000 s) 408 R R % R R % R3 500-R % R1-R % Source: Amps 2011, XDS Note: Adults with no personal income:

23 23 Unsecured loans granted by banks and other CPA members have a higher income profile PERSONAL INCOME R PERSONAL LOAN 17% ADULTS 18+ (000 s) 408 R R % R R % R3 500-R % R1-R % Source: Amps 2011, XDS Note: Adults with no personal income:

24 24 compared to unsecured loans granted by micro lenders who submit data to the National Loans Register PERSONAL INCOME R MICROLOAN 5% ADULTS 18+ (000 s) 408 R R % R R % R3 500-R % R1-R % Source: Amps 2011, XDS Note: Adults with no personal income:

25 While there has been a recession, the income pyramid has continued to shift since In 2011 there were 1.2 million additional people earning R per month or more compared to PERSONAL INCOME POPULATION PYRAMIDS: ADULTS 18+ ADULTS 18+ (000 s) ADULTS 18+ (000 s) R R R R R R1- R Source: NCR Consumer credit report, AMPS

26 26 Not everyone with a personal income is employed, particularly at the bottom of the income pyramid WORKING FULL-TIME OR PART-TIME PERSONAL INCOME EMPLOYED ADULTS 18+ (000 s) EMPLOYED ADULTS 18+ (000 s) R % % R R % % R R % % R1- R % % Source: NCR Consumer credit report, AMPS Employed Unemployed

27 27 The public sector has grown by workers since 2008 while the wage bill has increased by R110 billion 2.01m 0.27m 1.75m PUBLIC SECTOR WORKERS (aged 15+): Trend 2.28m 0.30m 1.98m CAGR 3.1% 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 National/provincial/local government Government controlled business (e.g. Eskom, Telkom) PUBLIC SECTOR WAGE BILL: COMPENSATION OF EMPLOYEES (R Billions) /8 2008/9 2009/ / / / / /15 16% up to 2010/11 Actual values 2006/2007 estimates Current estimates Source: Labour Force Survey 2012 Q1 (trend data 2008Q1 2012Q1), Medium Term Budget Policy Statement (compensation of employees)

28 28 The total Rand value of new loans granted has increased by 7% per annum since 2008 VALUE OF LOANS GRANTED PERSONAL INCOME CAGR R R214.6 BN R252.6 BN 5.6% R R R28.1 BN R45.1 BN 17% R R R37.4 BN R49.2 BN 9.6% R1- R3 500 R21.3 BN R21.2 BN -0.2% VALUE OF LOANS GRANTED: R301 BILLION VALUE OF LOANS GRANTED: R368 BILLION Source: NCR Consumer credit report, AMPS

29 29 Mortgage lending has declined across the pyramid VALUE OF MORTGAGES GRANTED PERSONAL INCOME CAGR R R132.0 BN R100.6 BN -9% R R R7.6 BN R6.1 BN -7% R R R3.8 BN R2.0 BN -20% R1- R BN BN -51% VALUE OF LOANS GRANTED: R143 BILLION VALUE OF LOANS GRANTED: R109 BILLION Source: NCR Consumer credit report, AMPS

30 30 Market growth can account for some of the shift. But loans sizes have grown strongly VALUE OF UNSECURED LOANS GRANTED PERSONAL INCOME R R5.5 BN R29.7 BN (CAGR: 76% CP: 30%) R R R4.3 BN R18.0 BN (CAGR: 61% CP: 30%) R R R10.8 BN R26.0 BN (CAGR: 34% CP: 16%) R1- R3 500 R9.7 BN R9.5 BN (CAGR: -1% CP: -7%) VALUE OF LOANS GRANTED: R30.3 BILLION VALUE OF LOANS GRANTED: R83.3 BILLION Source: NCR Consumer credit report, AMPS. * Record growth at Capitec Bank, Capitec Investor Relations, 28/03/2012 CP: Caeteris Paribus holding penetration constant, loan sizes constant in real terms but allowing for market growth

It appears to be significant 31 NCR: Claimed usage of unsecured personal loans granted

?? African Bank: Top 3 uses of loans (number or value?

31 Consolidation is a key trend. This is likely to inflate numbers although we are not certain of the substitution pattern across credit categories. There is also limited published data on the extent of consolidation. It appears to be significant 31 NCR: Claimed usage of unsecured personal loans granted (Rm) 26% of unsecured personal loans used for consolidation??? African Bank: Top 3 uses of loans (number or value???) 25% of unsecured personal loans used for consolidation??? According to NCR data (found in Capitec s financial results presentation) the proportion of loans granted for consolidation has been increasing over the past three years: 15% in 2009 Q3, 20% in 2010 Q3 and 30% in 2010 Q3

32 32 Lenders have increased loan terms in order to maintain affordability of larger loans 2009 Max Value: R Max Term: 3 years 2010 Max Value: R Max Term: 4 years 2011 Max Value: R Max Term: 5 years 2012 Max Value: R Max Term: 7 years Get maximum unsecured loan of R Initiation fee: R1 140 Interest rate*: 29% Term: 3 years Monthly repayment: R2 201 pm Get unsecured loan of R Repay capital outstanding on previous loan and new loan initiation fee: R Interest rate*: 27.5% Term: 4 years Monthly repayment: R2 201 Effective additional loan amount: R : Get unsecured loan of R Repay capital outstanding on previous loan and new loan initiation fee: R Interest rate*: 25%** Term 5 years Monthly repayment: R2 201 Effective additional loan amount: R : Get unsecured loan of R Repay capital outstanding on previous loan and new loan initiation fee: R Interest rate*: 21.85%*** Term: 7 years Monthly repayment: R2 201 pm Effective additional loan amount: R Total lock-in period: 10 years - Effective amount borrowed: R years Source: Capitec head office (Anneli Laing) Note*: Interest rates are assumed to be effective annual rates compounded monthly. Note**: This interest rate was not available and was thus estimated based on available data. Note***: Capitec listed a band of interest rates. The midpoint of this band was used.

33 In some cases micro loans are used to fund deposits on mortgages as LTVs decline MORTGAGES: 2011 Mortgages with unsecured loans*: 11

33 33 In some cases micro loans are used to fund deposits on mortgages as LTVs decline MORTGAGES: 2011 Mortgages with unsecured loans*: Mortgages: (Unique consumers: ) Micro loan: Personal loan: 9073 UNSECURED LOANS GRANTED WITH MORTGAGES* 0.6% 12.1 % 8.6% 5.0% 2.8% R20 - R250 R250 - R500 R500 R750 R750 R1 000 R Mortgage value (R thousands) Percentage with an unsecured loan of value at least 10% of mortgage Source: XDS Note: * Unsecured loans (personal or micro loans) taken 6 months (or sooner) before mortgage granted

34 34 Agenda So is there a bubble? A closer look at the market Health check Headline stats

35 It is difficult to interpret performance data as lenders have varying write off policies and the book is growing rapidly Billion Rands 25 20 15 10 5 0 Non performing loans Loans (000s) 1 600 1 400

35 35 It is difficult to interpret performance data as lenders have varying write off policies and the book is growing rapidly Billion Rands Non performing loans Loans (000s) Non performing loans Source: NCR 7.4 AGE ANALYSIS OF UNSECURED CREDIT ACCOUNTS: 90+ days (value of accounts, billions) Q Q Q Q Q2 16% 18% 17% 14% 15% AGE ANALYSIS OF UNSECURED CREDIT ACCOUNTS: 90+ days (number of accounts, thousands) Q Q Q Q Q2 19% 19% 18% 18% 19% 90+ days CAGR 28% 12%

36 36 Data on summonses and judgements for debt shows a declining trend while debt review applications appear to have declined since TRENDS IN LEGAL ACTION FOR TOTAL DEBT TO PRIVATE PERSONS ( ) CAGR*** ( ) Number % % 0 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Civil summons Judgements Debt review applications** Source: Stats SA, NDMA (National Debt Mediation Association) Note: * Insolvencies for private persons and partnerships; **For the year to end March; ***Compound annual growth rate January 2007 July Note that debt review applications cover the borrower and may involve several credit agreements

37 37 Credit bureau data indicates the number of borrowers who are in arrears across various product types % IN ARREARS (90+ days) CREDIT CONSUMERS (July 2012, Millions) 38% 36% 17% 49% 19% 28% 7% 9% Retail apparel Micro loan Credit card Retail furniture Other * Personal loan Mortgage Asset finance In arrears Not in arrears Source: XDS data * Other includes Retail General or Financial Other

38 Borrowers typically have multiple products with differing arrears profiles HAVE A MORTGAGE CREDIT CONSUMERS 2 256 955 HAVE A MORTGAGE 2 256 955 149 454 of these: IN ARREARS (7%) 1.

38 38 Borrowers typically have multiple products with differing arrears profiles HAVE A MORTGAGE CREDIT CONSUMERS HAVE A MORTGAGE of these: IN ARREARS (7%) 1.5m (67%) also have CREDIT CARD 11% in arrears 1.2m (54%) also have RETAIL APPAREL 16% in arrears 0.7m (31%) also have ASSET FINANCE 6% in arrears 19% 7% 0.5m 0.4m (22%) also have (0.2%) also have PERSONAL LOAN MICRO LOAN 18% in arrears 25% in arrears In arrears on any other loan* In arrears on mortgage [ 2.0m (88%) of those with a mortgage have other credit * ] Source: XDS data (July 2012) * Any of Credit card, Retail apparel, Retail furniture, Retail general, Asset finance, Personal loan, Micro loan, Financial other

Credit bureau data indicates that many individuals who were granted loans in 2011 are serial

Of those who took out a micro loan in 2011, 28% took out five of more micro loans NUMBER OF

card 6% 0% 0% 0% 82% 14% Retail apparel 3% 1% 0% 1 2 3 4 5+ 1 2 3 4 5+ Percentage of borrowers 33%

39 Credit bureau data indicates that many individuals who were granted loans in 2011 are serial borrowers. Of those who took out a micro loan in 2011, 28% took out five of more micro loans NUMBER OF UNSECURED LOANS OR FACILITIES GRANTED PER BORROWER IN Percentage of borrowers 93% Credit card 6% 0% 0% 0% 82% 14% Retail apparel 3% 1% 0% Percentage of borrowers 33% 22% Micro loan 10% 7% 28% 85% 13% Retail furniture 2% 0% 0% Percentage of borrowers 77% Personal loan 94% Retail general 15% 4% 1% 2% 5% 0% 0% 0% Source: XDS data

40 40 In each segment there is a noticeable minority of borrowers who appear to be stressed PROPORTION OF NET INCOME SPENT ON INSTALMENTS PERSONAL INCOME ADULTS 18+ (000 s) R R R R R R3 500-R R1-R % (0% - 10%] (10% - 25%] (25% - 50%] (50% - 75%] 75%+ Source: Amps 2011B, XDS Note: Adults with no personal income: % of adults with an income of R15,000 R30,000 and 1% of adults with an income of R30,000+ spend 0% of their income on instalments.there are a total of 458,000 credit active adults with a total instalment of R0. This is because they have paid off their accounts, but the account hasn t been closed yet. Instalments include arrears

41 41 Agenda So is there a bubble? A closer look at the market Health check Headline stats

42 42 So is there a credit bubble??

43 43 What we can say? Data to identify distress Regulator intervention Good Vs bad credit High levels of indebtedness across the market, but more pronounced in some segments Is debt stress worse than the financial stress that is a fact of life for so many? Is debt stress getting worse? We don t know yet, but we need to monitor it Do we need more borrower education? Does it work? Key data is not reported or not disclosed: Consolidation Real indicator of distress Change in debtor s book Activity by lender New voluntary delinquency management processes Garnishee orders Limited capacity and high turnover at regulator Anecdotal evidence of limited compliance High probability of intervention wrt credit life insurance, affordability assessments (if industry does not act first), garnishee orders (enforcing maximum percentage of pay, proscribed debt) Amnesty?? Very limited SME lending Impact of too much access to unsecured credit on access to mortgages

Interim results presentation 2017

Interim results presentation 2017 Contents Key indicators Operating environment What differentiates us Highlights Bank Save Credit Continued focus Key indicators Key indicators Earnings 4 000 3 500 3 000