Banks’ loan provisions ‘too low’
- 12 Mar 2012
According to Fitch Ratings consumer indebtedness and a reduction in real property prices means impairment coverage ratios for nonperforming mortgages are low.
Fitch Ratings expects South Africa’s major banks to need higher levels of provisioning for their nonperforming residential mortgage portfolios, it said in a report released on Friday.
Residential mortgages represent a significant proportion of consumer lending in SA, 62% as at June last year, and are almost solely provided by the five major South African banks. As a result, residential mortgages make up a large proportion of gross loans within these institutions.
In line with this lending composition, the nonperforming loans of these banks were concentrated in residential mortgage advances at the end of last year.
"While the reduction in South African property prices appears to have stabilised, the majority of the residential mortgage nonperforming loans remaining on banks’ books relates to loans originated in 2007 and 2008 at high original loan-to-value ratios," said Denzil de Bie, a director in Fitch’s financial institutions group.
Loan loss provisions are raised using robust historical data in line with global financial reporting standards. However, Fitch considers that the previously high level of nonperforming loans that self-rehabilitated due to consumer-driven action has moderated and will continue to do so. Fitch expects that higher levels of provisioning will be required.