Johannesburg - Moody's credit rating agency has lowered its outlook for South African banks' to "negative" from "stable", citing their overexposure to government debt, the deteriorating economic outlook and liquidity challenges.
South Africa has struggled to grow its economy as global uncertainty hurt exports to Europe and a mining crisis at home squeezed productivity, forcing Africa's largest economy to cut growth expectations to 2.5% in 2012.
"These weak macroeconomic conditions will put pressure on the banks' asset quality as well as on their bottomline," said Nondas Nicolaides, a vice president at Moody's.
Non-performing loans are starting to creep up, which Nicolaides expects to depress profit at big lenders such as Standard Bank, FirstRand, Absa Group and Nedbank.
The banks' outlook was also cut because of their link to government securities, whose rating Moody's downgraded to BAA1 from A3 in September.
The largest banks on average hold nearly 150% of their Tier 1 capital in local sovereign debt, Moody's said.
South African banks' overreliance on wholesale short-term deposits for funding also poses challenges in the adoption of Basel III liquidity requirements, the ratings agency said.
The banks will begin adopting the new Basel III banking regulations that form the world's regulatory response to the financial crisis in 2013.
Banks have been improving their short term liquidity and can easily meet their Liquidity Coverage Ratios, with little help from a central bank facility, but they are expected to struggle meeting the longer-term Net Stable Funding Ratio.
Not everything looks bad, Moody's said. South African banks are well capitalised and core earnings remained above normal during hard times.
Return on equity (ROE), a measure of profitability, fell to 14% in 2010 from 19% prior to the downturn. It has since climbed back to about 17%.
The banks' shares shrugged off Moody's assessment, with Standard Bank rising 2.3% to R108.07 at 13:10 GMT and FirstRand adding 1.8% to R30.28.