HomeCategoryIncome stress weighs on the financial sector

Income stress weighs on the financial sector

Downward Trajectory: As consumers and businesses reel from harsh conditions, insurers have expressed uncertainty about whether there is room for growth.

GDP Data released by Statistics South Africa last week pointed to the potential depth of the economic crisis looming this year, a year that is expected to see the lowest growth since the 2020 pandemic-induced recession.

Like the fourth quarter of last year, in which the economy contracted by 1.3%, load shedding it will continue to weigh on growth, hampering any prospect of bringing down the country’s ultra-high rate. unemployment rate.

Meanwhile, consumers have been left reeling from soaring inflation and higher Interest rates.

An interesting feature of the GDP data was the revelation that financial services, the country’s largest economic sector, suffered its deepest contraction since the second quarter of 2020. The sector, which contracted 2.3%, also it was the biggest drag on growth in the fourth quarter. last year, mainly due to lower economic activity in financial intermediation, pension funds and insurance.

Points of weakness in the sector expose the extent of pressure on businesses and consumers amid recent recessionary headwinds, which threaten to bite into revenues for their uptight clientele.

This week, old mutual became the latest insurer to point to the effects of a prolonged period of low growth and high inflation on its business.

Old Mutual’s overall profit rose 10% to R7.9 billion for the year ending December 2022, according to the group’s financial results, published on Tuesday. But Chief Executive Iain Williamson pointed to the difficult economic conditions weighing on his clients and the growth potential of the industry.

He described the many hits the economy has suffered since the Covid-19 pandemic hit, including the 2021 civil unrestdevastating last year floods in KwaZulu-Natal, high inflation, higher interest rates and severe load shedding. These factors, including the slow recovery in employment, have negatively affected real income growth, she noted.

“This downward pressure on disposable income growth, combined with depressed confidence, made it difficult for clients to maintain or increase their contributions to protection, savings and investment products.

“The growth and liquidity levels of our corporate clients were also negatively affected,” Williamson said.

Old Mutual’s personal finance and wealth management segment apparently bore the brunt, as the value of its new business fell 47% last year compared to 2021.

“The continued effect of the macroeconomic environment on our clients’ ability to maintain or increase protection, savings and investment products will continue to be a challenge in 2023,” Old Mutual’s results note. “We will continue to drive sales activity and the right mix in personal finance to accelerate market share growth.

“However, there is considerable uncertainty as to whether the overall industry market will grow in the current economic environment.”

This statement from Old Mutual comes a week later metropolitan impulseInterim results for , which contained similar concerns about its ability to expand amid strong economic headwinds.

The insurer reported a 46% increase in normalized overall profit to R2.2bn for the six months ended December 31, 2022 and its profits doubled to R1.9bn over the period.

(John McCann/M&G)

But the group’s growth was hit by weakness in its investments and non-life insurance business. Momentum Investments, according to the results, reported lower operating profit, primarily due to reduced revenue on its Momentum Wealth platform, driven by lower new business volumes and weak market performance.

The group further reported that the present value of new business premiums decreased to R33.3bn, down 10% from the prior period. impulse investments experienced a 17% decline in the present value of new business premiums amid lower new business volumes across both its local and international wealth platforms.

“As a general trend, difficult economic conditions appear to be negatively affecting sales volumes,” the results noted.

Recent pressure on sales volumes is a concern, the company added.

“Disposable income remains under pressure due to rising interest rates and high inflation, as well as a lack of economic growth in South Africa. This is likely to put continued affordability pressure on new business volumes, particularly on long-term savings and protection business.”

Momentum Metropolitan CEO Hillie Meyer noted this crisis in the group’s integrated results last year, saying: “I am concerned about the socio-political situation facing the country and it will become increasingly difficult to further grow revenue in the absence of a significant economic growth. ”

It is difficult to reconcile the fourth-quarter GDP numbers with the strong financial results generally reported by companies in the financial services sector, he noted. patrick rassouinvestment director of Ashburton Investments.

“So they’re still growing… But where we see some tension is at the lower end of the market, the mass market. There are some signs of tension emerging, that’s pretty clear. If you look at insurers, the corporate sector has picked up and the top end has picked up, which you can see in the Discovery numbers,” Rassou said.

Discovery, which caters to the higher end of the market, reported a 15% increase in new business in the six months to December 31.

“So, it’s not uniform. You have to watch the segments to see what’s really going on.”

(John McCann/M&G)

Headwinds in the insurance industry are complex and include continued volatility in the investment market on the back of Russia’s war in Ukrainesaid Nishen Bikhani, partner at KPMG South Africa. In addition, rising inflation and high energy prices have had a negative effect on consumers who were already under pressure.

Bikhani said there is a big gap in South Africa between those who can afford protection insurance and those who cannot.

Recent data has shown the extent of the pressure on consumers amid tighter financial conditions. The so-called mass segment, according to Eighty20’s credit stress report for the fourth quarter of last year, saw a R2.5bn increase in their credit card balance last year, indicating a greater reliance on credit for daily purchases.

The average installments of the loans of this segment absorbed more than a third of the monthly income.

The middle class is also facing increased pressure. The segment’s total average loan fee-to-income ratio has increased 7.4% over the past year and now stands at 69.4%. This means that more than two-thirds of the average wage for the middle class goes to servicing debt, the data analysis firm noted.

Outlook from KPMG’s insurance chief executive highlighted that insurers are actively strategizing to respond to the pressures facing consumers, according to Bikhani.

“Insurance CEOs are preparing themselves and their organizations to meet today’s economic and geopolitical challenges while exploring how they can mitigate the impacts of the recession,” he said. For this reason, Bikhani believes that the insurer’s performance will pick up, although it could continue to be hit in the short to medium term.

In November, the Reserve Bank of South Africa He pointed to slow and inequitable economic growth as a risk to financial stability, noting that unemployment and low income reduce demand for financial services, credit, and access to finance.

(John McCann/M&G)

Limited progress in implementing structural reforms leaves the economy vulnerable to a prolonged period of weak and inequitable growth, the Reserve Bank’s Financial Stability Review noted.

In January, the Reserve Bank gave a bleak view of the country’s growth trajectory, forecasting growth of just 0.3% this year. Although the Treasury forecast was slightly better, it is still only forecasting 0.9% growth this year.

Uneven growth also increases “the risk of populist policies and social instability, which in turn can have a negative impact on investor confidence, financing costs, insurance claims and operating costs,” the Bank of the reserve.

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