Why you are the biggest risk to banks right now
While South African banks continue to perform well despite low economic growth and ongoing political instability, overall growth remains low due to a number of weaknesses including the high level of household debt, according S&P Global Ratings.
The ratings firm published its ‘Banking Industry Country Risk Assessment: South Africa’ report on Thursday, in which it classifies the banking sector of South Africa as negative (foreign currency BB+/Negative/B; local currency BBB-/Negative/A-3).
This economic risk trend, it said, reflects low economic growth, weak consumer and corporate confidence, heightened political risk, and weak state-owned enterprises. “These risks are exacerbated by the structural external vulnerabilities of South Africa and a volatile local currency.”
S&P said it expects real GDP growth to be limited to 1% in 2017, “but we think there will be a slight acceleration to an average of 1.5%-2.0% per year over 2018-2020. Total private sector credit has increased by less than 1% of GDP over the past three years and current year and household lending has been shrinking in real terms over the same period,” it said.
The ratings agency said it continues to expect very modest growth in retail lending over the next 18 months as the low economic growth, rising unemployment, and political uncertainties continue to confine consumer confidence.
“We continue to believe that domestic households pose the most significant source of risk for the banks because of their relatively high leverage and low wealth levels compared with other emerging markets,” it said.
High but reducing household leverage
On a positive note, S&P said that household leverage – defined as household debt to disposable income – has been gradually decreasing over the past few years, to 74.4% at year-end 2016 from 85% in 2008.
Less positive, however, is that the nature of this leverage has changed over the past five years from secured residential mortgages and toward more unsecured lending and installment credit, it said. In 2014, mortgage advances fell behind as the dominant source of retail credit to other combined retail debt for the first time in South Africa’s history. By year-end 2016, mortgage debt accounted for 49% of total retail credit.
It said that this reflects two trends, namely: the relatively quicker deleveraging of the wealthy versus the middle and lower income markets; and, a tightening of credit policies restricting access to long-term secured credit in favor of shorter-term, higher-margin loans.
“As a result of this and due to pressure on disposable income from slower real-wage growth versus inflation, we believe that general household affordability has weakened, despite the decline in household leverage,” S&P said. It illustrated this point by underlining the debt service-to-disposable income ratio, which increased to 9.6% in 2016 from 8.7% in 2012.
“Over the past few years, modest interest rates and inflation have been dually responsible for weaker household affordability. Positively both of these factors appear unlikely to rise in the next 12-18 months, absent exogenous shocks,” S&P said.
S&P pointed out that the South African private sector has a low debt burden capacity due to low wealth levels and wide income disparities. “We estimate per capita GDP at approximately $6,000 for 2017, which in US dollar terms is still lower than in 2010. In rand though per capita GDP has increased by about 5% for the past five years, just below inflation and this is broadly expected to continue,” the financial services firm said.
On the whole, private sector leverage – including total household debt, corporate credit from the banks, and internal and external capital markets – to nominal GDP of about 87% is high and likely to remain so.
Silver lining
S&P said that South African households and corporates have somewhat prepared for longer term economic and political instability by minimizing leverage over the past few years.
“We see the trend for banking industry risk as stable because we consider significant deterioration of South African banks’ profitability or funding profiles as unlikely. If the banks become more reliant on more volatile funding, or change to a net debtor position, we could lower our assessment,” it stressed.
“Furthermore, we believe the recent regulatory changes on the affordability guidelines and additional charges for unsecured lenders will continue to restrain unsecured credit growth at current levels.”
Read: SA economy has already returned to positive growth: economist
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