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Jeremy Maggs: South Africa may be entering a stronger phase of nominal growth this year, but behind the scenes credit risk is becoming a bit more uneven, with increased dispersion, stress pockets and early signs of contagion that traditional indicators tend to miss.
That’s interesting. Crowdsourced credit intelligence gathered from financial institutions with actual exposure is increasingly being used to identify tipping points before they appear in financial statements or market spreads.
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I would like to take a closer look at this. I’m currently talking with Mark Faulkner, co-founder of Credit Benchmark, about what people are seeing and what the next risks are for South Africa.
Mark was very warm and welcoming. At a headline level, I don’t think it’s an exaggeration to say that the outlook is improving. But you point out that risk diversification is increasing. Why is this happening? And what are the early red flags that the crowd is sensing that may not be recognized by traditional data?
Mark Faulkner: Thank you for having me. That’s an interesting question, thank you.
One thing I’ve learned in Credit Benchmark’s 10-year journey is that despite the tendency to model things and focus on spreadsheets and technology, credit is still an art. It’s an art, or at least an art as well as a science.
There is a range and diversity of opinions within the banking community, and even within the non-banking community, and this is an important part of the credit process.
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What we’ve been doing over the last 10 years, and what we’ve been very proud of contributing to the South African banking community for another seven or eight years, is collecting data from the banks that make credit decisions, the banks that make credit decisions, so that we can understand whether they’re conservative or blunt, fast or slow in their view of the credit environment.
You’ve probably never met a rogue banker. They all think they are conservative.
But wouldn’t it be interesting to know how your colleagues feel about the market or industry you’re involved in? We’re an aggregator of consensus views from people in the game.
Because we don’t have a view on credit ourselves, we couldn’t stop and say that we think credit is getting worse or changing because of this or that. What we can do is show that the range of opinions is changing.
The world of credit risk has been relatively benign over the past decade, especially since COVID-19.
Because of the great generosity of central banks, politicians, and the banking community to ensure global liquidity, very few institutions actually went bankrupt. It takes a lot of effort to file for bankruptcy at this time and these days.
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But there is a growing sense that this is going to change, and the data shows that. That’s what we’re seeing: we’re starting to see the beginnings of a divergence of opinion.
Jeremy Maggs: Let’s talk a little bit about that dispersion. The data is real, so I think the key word here is skin in the game. The data is real. What do you generally think about South Africa’s current resilience? What is strengthening? And can you tell me where stress is silently starting to build up?
Mark Faulkner: Interesting. The overall story remains positive, something you’ve mentioned several times, and there’s no reason to dispute that positivity. This is a very well-banked market. There’s so much competition here.
I think Salve (South African Reserve Bank) should be impressed with the level of oversight and soundness of the market here, but I don’t think there are any particular areas of concern here in South Africa.
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What we noticed is that South African banks are very interested in starting services across the African continent. They are, for lack of a better expression, increasingly keen to become providers of finance, liquidity and credit north of South Africa.
The data we have collected shows that more and more activity is taking place on the African continent, and banks are trying to take the lead. And when you factor in shadow banking and competition for non-bank lending, we see banks becoming more ambitious on the continent, just as they are here in South Africa.
Jeremy Maggs: Of course, it’s all against the backdrop of the global situation. One of your themes is transmission risk. So, what kind of infection routes are beginning to emerge?
Mark Faulkner: The competition that the banking sector is facing with the private credit market, I think it used to be called the shadow banking market, but I think it can now be called the private credit market.
One thing the banking world has always done is to be conservative rather than blunt.
The dataset we provide to banks is aggregated from over 40 banks, half of which are global systemically important banks (G-Sibs). This allows banks to ensure that the underwriting standards they pursue and maintain are appropriate to their risk tolerance.
Sometimes the best trades you make throughout the day are the ones you don’t make. It’s about knowing when to say no. It is sensitive to outliers.
The risks aren’t always where you think they are. I think it would be disrespectful to say that any particular sector of the market is vulnerable.
But I think it’s fair to say that competition from the less regulated private credit sector is something that every chief risk officer, every chief credit officer, every modeling officer is sitting up and taking notice of.
They have a deep responsibility to protect the organization. In my experience and in our experience, they are very curious people. Most of them confidently admit that they don’t know everything. Then we can help them.
If you are not aware of your responsibility, if you are not curious, if you are not confident enough to admit that you do not know everything, you will never learn anything.
Jeremy Maggs: Curiosity is one thing, but all of this is backed up by data. I heard that your coverage in South Africa has doubled. Will we now be able to show banks, insurance companies and asset managers things that we couldn’t see 12 months ago because we have expanded datasets?
Mark Faulkner: The main difference was that we added some important commercial banking datasets to consensus, which made the dataset much brighter.
Not only has it shed light within the South African market, but it has also shed light on Africa by adding commercial data that was previously missing.
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It was commercial bank data. Typically, we start with investment banks and larger institutional names. We had some pockets of commercial banking data, so we started pulling it out. For lack of a better word, I started joining the conversation a year ago.
We are now here to receive that data locally and from the continent and almost come full circle to unravel the dataset.
Jeremy Maggs: I’ll leave it at that. Mark Faulkner, Co-Founder of Credit Benchmarking. Thank you for your time. thank you.
Mark Faulkner: Thank you.
