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Cape Town - South Africa’s banking sector is stable even though the economy is struggling with low economic growth, according to Standard & Poor’s (S&P).
In a report on the 2018 outlook for the banking sector released on Friday, ratings agency S&P said that for the first time since 2013, the outlooks for rated South African banks are stable.
“Thanks to their fairly robust financial performance, these banks have found a balance between weak economic growth and low investor and household confidence in South Africa,” said S&P.
In the report, S&P stated that South African banks still face the same challenge as it did in previous years, these being weak economic growth and political noise. State-owned enterprises with significant liquidity and governance challenges continue to strain confidence in businesses, consumers and investors. And the constrained fiscal position is delaying recovery of the economy, the report indicated.
But SA banks may be able to withstand these challenges given their strong credit standings. “South African banks are less exposed to external factors than their emerging market peers,” S&P noted.
“We expect South African banks will continue to enjoy resilient financial performance in 2018, although we believe profitability has likely peaked,” said S&P.
Political turmoil
The improved private sector sentiment following the election of Cyril Ramaphosa as ANC president will not immediately translate into private sector investment, said S&P.
This is because the private sector optimism is largely based on hopes that Ramaphosa will push forward the state capture inquiry, and tackle corruption at state-owned enterprises and bring about policy certainty and fiscal discipline. But these are “significant hurdles” to jump, stated S&P.
The political turmoil in the country has not negatively impacted the banking sector, even while the reserve bank’s independence was challenged last year. S&P said the debate on its nationalisation is “just a wrinkle” in the political dialogue, but emphasised that its independence is essential.
Profitability
S&P expects credit losses for the top-tier banks to be within a range of 0.7% and 1% in 2018. While lower-tier banks, such as unsecured consumer lenders, are expected to drive large sector-wide losses.
“We still believe that domestic households pose the greatest source of risk for South African banks, because of their relatively high leverage and low wealth levels compared with other emerging markets,” said S&P.
But S&P also noted there has been an improvement in the financial health of households. Particularly household debt to disposable income has been improving for the past eight years.
S&P expects a deterioration in corporate loan books, mainly due to rising leverage (debt to finance assets) and weaker profitability. “We continue to see material risks stemming from the construction sector,” the report read.
S&P also said that the full effect of the Steinhoff fallout is yet to play out. “However, we understand the domestic banks are exposed to the separately listed South African retail group, which appears to be less affected at this stage.”
“Against the context of low growth and stable credit losses, we expect South African banks to maintain robust profitability and sound capitalisation in 2018,” it said in its closing remarks.
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