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JEREMY MAGGS: South Africa may be entering a stronger nominal growth phase this year, but under the surface, credit risk is becoming a little more uneven, with widening dispersion, pockets of stress and early signs of contagion that traditional indicators often miss.
And that’s interesting. Crowd-sourced credit intelligence, aggregated from institutions with real exposure, is increasingly being used to spot the turns before they show up in financial statements or market spreads.
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I want to explore this in a little more detail. I’m in conversation now with Mark Faulkner, who’s co-founder of Credit Benchmark, to tell us what the crowd is seeing and what South Africa’s next risks might be.
Mark, a very warm welcome. At headline level, I think it’s fair to say the outlook is improving. But you make the point that risk dispersion is widening. Why is that happening, and what are the early danger signals the crowd is picking up that maybe traditional data isn’t?
MARK FAULKNER: Thank you for having me. It’s an interesting question, thank you.
The one thing I’ve learned over the 10-year journey of Credit Benchmark is that, notwithstanding the propensity to model things and look to spreadsheets and technology, credit remains an art. It’s more art, or at least as much art as it is science.
There is a range and diversity of opinion within the banking community, and increasingly the non-banking community, that is an important part of the credit process.
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What we’ve done over the last decade, and we’ve been very proud to be of service to the South African banking community for seven or eight years now, is to gather data from those with skin in the game, banks that make the credit decisions, to help them understand whether their view of the credit environment is conservative or cavalier, early or late.
You’ve probably never met a cavalier banker. They all think they’re conservative.
But wouldn’t it be interesting to know what the sentiment is of your peers with regard to the markets that you’re exposed to, the industries you’re exposed to? We are aggregators of the consensus view that comes in from those with skin in the game.
We don’t have a credit view ourselves, so I couldn’t stand back and tell you we think that credit is deteriorating or changing because of this or that. What we can do is indicate that the range of opinion is changing.
Over the last decade, the world of credit risk, and since particularly Covid, has been rather benign.
The largesse and generosity of the central banks, of the politicians, of the banking community to ensure liquidity for the world has meant that very few organisations have actually gone bust. You need to work quite hard to go bust at this moment in time and over recent times.
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But there’s a growing sense that this will change, and you can see that in the data. That’s what we’re picking up – that we’re starting to see the beginnings of a dispersion of opinion.
JEREMY MAGGS: Let’s talk a little bit about that dispersion. I think the key phrase here is skin in the game because the data is real. The data is authentic. What’s the general sense about South Africa’s resilience right now? What is strengthening? And are you able to tell us where the stress is starting to build quietly?
MARK FAULKNER: It’s interesting. The overall story remains positive, which is the thing you’ve mentioned a couple of times, and we don’t see any reason to challenge that positivity. This is a very well-banked market. There’s a great deal of competition here.
I think one has to be impressed by the standard of the Sarb’s [South African Reserve Bank] oversight and prudential oversight of the market here, and I don’t think there are any particular areas of concern here in South Africa.
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What we’ve picked up on is a great interest from the South African banks to start being of service to the continent in general; that they are increasingly keen to be the providers of finance and liquidity and credit north of South Africa, for want of a better way of putting it.
The data that we’ve gathered shows that we can see more and more activity in the continent, and the willingness of the banks to be on the front foot – and in the light of shadow banking, non-banking lending competition, they’re being more ambitious continentally as well as they are here in South Africa.
JEREMY MAGGS: All, of course, against the backdrop of a global picture. One of your themes is contagion risk. What kinds of contagion pathways then are starting to emerge?
MARK FAULKNER: I think the competition that the banking sector is facing from the private credit markets – I think it used to be called the shadow banking market, but now I think one could call it the private credit market – is huge.
One of the things that the banking community has always done is sought to be conservative, not cavalier.
The data set that we provide to them, and which is aggregated from 40-plus banks, half of which are Global Systematically Important Banks [G-Sibs], enables them to ensure that the underwriting standards that they are pursuing and maintaining are appropriate with that risk appetite.
Sometimes the best deal you do all day is the deal you don’t do. It’s knowing when to say no. It’s being sensitive to the outliers.
Risk isn’t always where you think it is. I think it would be imprudent of us to say there’s a particular sector of the market that’s vulnerable.
But I think it would be fair to say that the competition from the lighter-regulated private credit sector is something that’s making all chief risk officers, all chief credit officers, all heads of modelling sit up and take notice.
They are deeply responsible for protecting their organisations. They are, in my experience, in our experience, very curious individuals. Most of them have the confidence to admit that they don’t know everything. That’s when we can be of service to them.
If you don’t recognise the responsibility, if you aren’t curious and you aren’t confident enough to admit that you don’t know everything, you can’t learn anything.
JEREMY MAGGS: Curiosity is one thing, but all of this is underpinned by data. You’ve doubled, I understand, coverage in South Africa. So you have an expanded data set, what are you able to allow banks, insurers and asset managers to see now that maybe they couldn’t see 12 months ago?
MARK FAULKNER: The primary difference has been that we’ve added a couple of significant commercial banking data sets to our consensus, and that’s really lit up the data set.
It’s not only lit it up within the South African market, but to the extent that the commercial data that was missing hitherto has now been added, it is lighting up Africa as well.
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It was commercial banking data. We typically start with the investment banking, larger institutional names. We had a couple of pockets of commercial banking data, which we began wheedling out, for want of a better word, we began bringing on board in conversations a year ago.
We’re now here to almost take a lap of honour, having received that data locally and continentally, to light up the data set.
JEREMY MAGGS: That’s where we are going to leave it. Mark Faulkner, co-founder, Credit Benchmark. Appreciate your time. Thank you.
MARK FAULKNER: Thank you very much.
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