Moody’s warns SA banks could see rise in problem loans

Cape Town – South Africa's sluggish economy will likely lead to a rise in problem loans at SA’s four biggest banks, Moody's Investors Service said in a report this week.

Moody’s said in a statement on Tuesday that credit risks should remain manageable, posing only moderate downside risks to banks' earnings.

"Sluggish economic growth in South Africa over the next 12 to 18 months will pose challenges for the country's four largest banks," said Moody's vice president Nondas Nicolaides.

"The subdued South African economy will restrain their lending growth and make it harder for borrowers, especially households, to service their debt repayments."

South Africa's weaker economic growth, combined with rising interest rates and high inflation of above 6%, will exert pressure on households' disposable income and borrowers' repayment ability, exposing banks to higher default risks, it said.

A Moody’s representative said last week that South Africa measures favourably in most aspects, except economic growth, according to NKC Consulting.

It currently rates South Africa two notches above sub-investment grade with a negative outlook and its next review is due in December.

Moody's said it expects non-performing loan (NPL) ratios in the banking system to increase to around 4% by the end of 2017 from 3.2% in June 2016.

National Credit Regulator data for mortgages in arrears for longer than three months are classified as NPLs.

“This will generate higher provisioning costs that will dampen profitability with return on assets (RoA) potentially reducing towards 1% from 1.2% as of June 2016,” said Moody’s.

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“While the four banks' loan books are skewed towards residential mortgages, they are likely to suffer only modest credit losses because of tighter lending practices in recent years with lower loan-to-value levels and an effective legal framework in South Africa for handling the foreclosure of banks' collateral, which contain home loan credit losses,” it said.

“Corporate debt in South Africa has risen in recent quarters, but it remains manageable and Moody's expects companies to remain more resilient than households to withstand the challenging period ahead.”

Moody’s said FirstRand Bank is best-placed to manage the weak operating environment among its local peer banks, as it has the lowest level of NPLs.

“FirstRand also has the highest overall provisioning coverage for NPLs, the highest capital base and strong earnings generation.

“FirstRand's NPL ratio was 2.4% at the end of June 2016, followed by Nedbank at 2.6%, compared to an average 2.9% for the four largest banks and 3.2% for the system,” it said.

Bad loans sees gradual decline at FNB

FNB – a subsidiary of FirstRand – released its Residential Mortgage Barometer on Tuesday, which said the projection for the value of NPLs will show a gradual declining trend in the near term, averaging 3.2% of total loans outstanding in 2017 after a forecast 3.3% for 2016 as a whole.

“Residential Mortgage Sector vulnerability to economic and interest rate shocks has been greatly reduced through a significant reduction in the level of Household Sector indebtedness since 2008,” FNB economist John Loos, the author of the report, said.

“We conduct a hypothetical model simulation where we re-create a 2008-style economic shock in 2017. The result is a significantly smaller deterioration (rise) in industry-wide non-performing loans to 5.7% of the value of total loans in 2018, compared to a more severe 9.2% peak in 2010 just after the financial crisis.”

However, Loos said FNB did see NPLs rise to 3.4% of the value of total Household Sector mortgage loans outstanding by the second quarter of 2016, from a lowly 3.1% at the end of 2015.

“But this is not a severe rise, and the percentage remains very low compared to a painful high of 9.4% reached in the 1st half of 2010, following the 2008/9 recession and 2008 Prime Rate interest rate peak of 15.5%.”

“So, while there is a distinct lack of growth in the Residential Mortgage Market, which appears set to continue, the market continues to perform well, under the poor economic circumstances, in terms of the level of mortgage debt repayment performance.”