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Cape Town - Downside risks to the South African economy will weigh on the credit prospects of domestic banks over the coming year, said Standard & Poor's Ratings Services in a report on Monday.
The rating agency said lacklustre economic growth, labour tensions, and the high current account deficit that is predominantly funded by volatile portfolio flows have led it to assign a negative outlook on the country.
"In turn, South African banks that we rate continue to have negative outlooks," said Standard & Poor's credit analyst Matthew Pirnie.
"We don't rate banks in South Africa above the sovereign foreign currency rating because of the direct and indirect influence that domestic economic performance has on banks' financial performance."
The report said the rating agency did not expect to raise banks' ratings in 2014. What's more, a sovereign downgrade would result in a similar rating action on the rated banks, the report said.
Alongside economic tensions, South African banks face other potential pressure points on their credit quality this year. A rise in inflation and interest rates, or a significant drop in real estate prices could increase their credit risks and restrain earnings, said Standard & Poor's.
Nevertheless, in the absence of financial system-wide shocks, the rating agency said it expects banks to maintain stable earnings, asset quality, and capitalisation.
It also expects banks to achieve modest loan growth, supported by the return of mortgage lending and a small peak in credit losses at year-end 2013 followed by an improvement throughout 2014.
Over the long term, South African banks' continuing expansion into other African markets could also expose them to economies with higher credit risks.
The rating agency said lacklustre economic growth, labour tensions, and the high current account deficit that is predominantly funded by volatile portfolio flows have led it to assign a negative outlook on the country.
"In turn, South African banks that we rate continue to have negative outlooks," said Standard & Poor's credit analyst Matthew Pirnie.
"We don't rate banks in South Africa above the sovereign foreign currency rating because of the direct and indirect influence that domestic economic performance has on banks' financial performance."
The report said the rating agency did not expect to raise banks' ratings in 2014. What's more, a sovereign downgrade would result in a similar rating action on the rated banks, the report said.
Alongside economic tensions, South African banks face other potential pressure points on their credit quality this year. A rise in inflation and interest rates, or a significant drop in real estate prices could increase their credit risks and restrain earnings, said Standard & Poor's.
Nevertheless, in the absence of financial system-wide shocks, the rating agency said it expects banks to maintain stable earnings, asset quality, and capitalisation.
It also expects banks to achieve modest loan growth, supported by the return of mortgage lending and a small peak in credit losses at year-end 2013 followed by an improvement throughout 2014.
Over the long term, South African banks' continuing expansion into other African markets could also expose them to economies with higher credit risks.
