S&P upbeat on SA banks despite fragile growth

Johannesburg - South African banks continued to perform well, despite low domestic economic growth and ongoing political instability, according to a new report from ratings agency Standard & Poor’s.

S&P’s Financial Institutions Monitor said despite severe challenges facing South Africa, its banks continued to hold their own in the face of adversity.

The agency kept South African banks' economic risk at “5”, in the survey’s Banking Industry Country Risk Assessment. A score of 10 indicates a very high risk, with the banks of Nigeria, Greece, Ukraine, Belarus and Egypt all landing at the bottom of the pile with a 10. Liechtenstein's banks scored highest with a score of 2.

In April the ratings agency downgraded South Africa's foreign currency sovereign rating to BB+ from BBB- with a negative outlook. The local currency was downgraded to BBB and remained investment grade. This  followed the Cabinet reshuffle where President Jacob Zuma replaced former finance minister Pravin Gordhan with former home affairs minister Malusi Gigaba.

S&P last month kept the country at the same rating.

But the Financial Institutions Monitor did indicate that the ratings agency is watching noise around South Africa’s Reserve Bank (SARB) with a hawk's eye.

• READ: Traders on edge dump rand as SARB becomes target in politics

The ratings agency cited the ongoing drama around the independence of the Reserve Bank as a concern after Public Protector Busisiwe Mkhwebane last month recommended that the mandate of the SARB be changed – a matter she had not been asked to consider.

“We recently observed threats to the independence of the South African central bank from political interference,” S&P said.  

“This we believe would be negative for the institutional framework of the country's banks if it materialises, but we don't expect that to happen anytime soon.”

One of Mkhwebane's remedial actions is an instruction to the chairperson of the Portfolio Committee on Justice and Correctional Services to “initiate a process that will result in the amendment of Section 224 of the Constitution”. This would remove the mandate of the SARB to protect the value of the currency.

• READ: Public Protector defends SARB stance but won't oppose court application

However, on Monday Mkhwebane backtracked on this proposed change. In an affidavit, she stated she won't oppose the SARB’s review application.

According to the report, South African banks’ credit impairments dropped slightly and capitalisation strengthened in the first quarter of 2017.

“We continue to expect very modest lending growth over the next 18 months,” S&P stated in the report, adding that sluggish economic growth, high unemployment, and political uncertainties continue to hold back wealth levels.

“This continues to pose the most significant risks for banks,” the ratings agency warned.

But they said deleveraging by households, negative real estate price dynamics since 2008, and reduced pressures from interest rates and inflation will somewhat support asset quality.

“We see some room for deterioration of corporate asset quality from adverse economic trends, especially for small businesses,” the report also stated.

African Bank's downgrade was also noted in the report, while FirstRand was listed among the top 25 banks of Central and Eastern Europe, the Middle East and Africa.

• READ: Why SA banks are truly world class

South Africa’s banks achieved the highest rankings for the second successive year in the Lafferty Group’s 2017 Global Bank Quality Benchmarking study.

The ratings in the benchmarking study provide an independent global measure of bank quality. Capitec was awarded Lafferty Group's highest 5 star rating, Absa achieved four stars and FirstRand, Standard and Nedbank were given three stars.