Low-income mortgage borrowers in SA are honouring their debts a lot better than subprime borrowers in the US.
This is just one of six reasons why SA banks have been relatively immune to the global financial meltdown, says Tom Boardman CEO of Nedbank (JSE:NED).
Speaking at a media party in Johannesburg Thursday night shortly after returning from the IMF, Boardman recalled that it was the Clinton administration that leant on the US mortgage giants, Fannie Mae and Freddy Mac, to lend to lower income people in the US.
"The idea was to increase home ownership. Unfortunately, while interest rates were 3% or 4%, people borrowed more than they could afford. When rates doubled, they defaulted in droves and Fannie and Freddie have had to be rescued by the Fed."
Boardman said SA banks had also been prevailed upon by government to lend collectively some R42bn to people in the R2 500-R7 000pm income bracket. The goal was also to increase home ownership. He said most of these borrowers were honouring their commitments.
"So far our bad debt experience in that area has been better than in the middle income market", he said. He added that so far unemployment in SA has not increased as dramatically as in the US and conceded these are early days.
Boardman said that while he was at the IMF-World Bank meetings, he attended a dinner for a number of the world's biggest names in banking with former Fed Chairman Alan Greenspan. (The CEO of the Royal Bank of Scotland had excused himself. He was busy arranging a bail-out package with Gordon Brown and resigned the next day.)
"I asked Mr Greenspan if the problem wasn't that the US had held interest rates too low for too long. He paused a long while...and then said ‘no'. But that pause said it all for the people around the table."
Boardman said excessively low interest rates were a mistake that SA has avoided. Our rates never plumbed the depths of those in the US and Europe and that prevented people from over-extending themselves.
SA banks were not nearly as geared as their counterparts overseas.
"Their lendings in some cases were 35 times their capital base. For every $35 they lent, they had only $1 of capital. Our banks in SA are not half as highly geared."
SA consumers also were not nearly as heavily indebted as their counterparts in the US and the UK. Boardman told me privately that SA corporates are in excellent shape and default rates in that area are negligible.
SA banks were also not as enmeshed in exotic instruments.
"Securitisation is still in its infancy. We had few of the debt instruments that worsened the crisis offshore."
Finally, we had exchange control. That prevented SA banks from depositing huge sums of money offshore in institutions that have folded or been put on life support.
Said Boardman: "Like most bank executives, I have been critical of exchange control and have advocated its removal. In principle, I still think it is a bad thing. But in the event, I have to say to Trevor, thank you very much."
Author - David Carte - http://www.moneyweb.co.za/mw/view/mw/en/page38?oid=233659&sn=Detail
