Things aren’t looking great for South African banks in 2017

Ratings firm S&P Global says that the general outlook for South Africa’s banks – much like South Africa itself – remains negative at the start of 2017, but pressure is easing.

In its South African Bank Outlook Report for 2017, S&P said this reflects the combined pressure of weak economic growth, as well as the persistent credit risk of over-leveraged households.

The outlooks on all rated South African banks remain negative at the start of 2017, continuing to reflect the combined pressures of weak economic growth and the persistent credit risk of over-leveraged households.

But with the GDP growth prospects for the year more optimistic than in 2016 – 1.4% versus 0.5% – and with hopes that the interest rate hikes are declining, there may be some hope for relief.

S&P said however, that it expects downside risks for South Africa’s rated banks to continue to lie dormant for the domestic banking sector, and credit losses for the top tier banks to lie between 0.8% and 1.0% in 2017.

S&P holds this current overview of the South African banking sector:

  • Low economic growth and high household leverage remain a persistent, albeit dormant, risk for bank credit quality.
  • Better growth and lower inflationary and interest rate pressure should allow for only a mild deterioration in asset quality.
  • Profitability should remain robust, although rest-of-Africa business may cause some volatility to the bottom lines.
  • Funding pressures have eased but remain a dominant risk.

“We expect the domestic banking sector’s return on equity to stabilize at 15%-19% for the next couple of years as the positive effect of the gradual rise in interest rates is mitigated by increasing provisions and cost of funds,” S&P said.

“We continue to believe the elements of industry dislocation that entered the system in 2015/2016 will have little or no impact on the profitability of the system. We do, however, believe the rest-of-Africa operations may represent an ongoing drain on some banking groups’ profitability over the next 12 months.”

South Africa’s strained economic growth remains a large hindrance, S&P said, pointing out that the economy remains directly and indirectly linked to commodity demand – particularly from China – and that while government has identified needed reforms, it won’t be implementing them any time soon.

“Without signs of real improvement or at least policy certainty and continuity, private sector investment is likely to remain low. Household spending will likely remain restrained,” it said.

Declining affordability for South African households can best be illustrated by the debt service-to-disposable income ratio, which increased to 9.3% in 2015 from 8.7% in 2012.

Over the past few years, modest interest rates and inflation have been dually responsible for weaker household affordability, the group said.

S&P said that while it sees the impetus for interest rate increases decline, it still anticipates an upward interest rate adjustment of 25-75 basis points over the next 12 to 18 months, with inflation sitting between 6% to 7%.

This, in turn, will have a negative impact on businesses, which have seen their ebitda margins gradually reducing over the past five years, particularly in the last two (excluding the mining sector), the ratings firm said.

However, as the banks have relatively little exposure to the mining sector (around 3% of total loans), they should be protected against the weak rand. As such, corporate loans are expected to outperform household loans in 2017.

SA banks rating profiles:

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Things aren’t looking great for South African banks in 2017