SA Affordable Housing January - February 2020 // ISSUE: 80 | Page 37

FINANCE MATTERS
Figure 3: Chart illustrating the expected loss by probability of default (PD) x loss given default (LGD).
EXAMPLE
Analysing a loan of R400 000, a PD of 5% and an LGD of
20% over a 48-month breakeven period. This means that
loans are priced such that a breakeven point of the required
return on equity is achieved in 48 months. This would
therefore indicate that loans are most likely not profitable
prior to this period.
Table 2: Bank profit over 48-month breakeven period.
INCOME
R144 250
the composition of the interest rate and is based on
average balance.
Table 3: Composition of interest rate based on average
balance.
Interest Rate
10.2%
Cost of Funds 6.34%
Cost of Capital 0.42%
Cost of Risk 0.92%
Interest (@ 10.2%) R139 300 Business Costs 0.7%
Initiation Fee R3 500 Profits 1.7%
Annual fee R1 450
EXPENSES
R120 274
Cost of Funds (@ 6.34%) R86 390
Cost of Capital R5 797
Account Set up Costs R12 670
Account Maintenance R2 631
Bad Debt Provision R12 786
FINAL PROFIT
R23 976
Table 2 above, shows that after 48 months; the bank realises
a profit of R23 976. This is based on a return to capital of
20% per annum.
Looking at this a different way, the bank makes a profit
of 1.7% of the average loan balance in the 48-month
period after the figure is annualised. The split below shows
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CONCLUSION
The Home Loan business for a bank is a volatile business, as it
is dependent on economic cycles and long-term investor
confidence in a country. By its very nature, property is a
commodity which operates within a cyclical bubble which
ranges from bust to boom. Whilst it compares favourably
with other forms of asset classes over the long term, there
are risks which both lenders and consumers alike face,
especially when property prices are in the decline due to
tough economic conditions, a stock over supply, or economic
or political uncertainty.
Housing is also a socio-economic need for families; one
should view property not only from an investment
perspective, but also from a family perspective. It has an
economic growth and job creation effect on the economy.
Whilst it can be viewed as the backbone for wealth creation, it
also carries with it social and political sensitivity, which makes
the role of a responsible lender that much more important.
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