Ratings agency Moody’s has maintained its negative outlook on South Africa’s banking system, stating that the lenders are likely to face more pressure over the next 12 to 18 months.
“Our negative outlook for South Africa’s banking system is mainly due to the weak operating conditions, which will challenge banks’ loan quality and profitability,” said Nondas Nicolaides, Moody’s vice president.
“Low economic growth will weaken banks’ loan quality and profitability.”
Moody’s forecasts real gross domestic product (GDP) growth in South Africa of only 0.5% this year, rising to 1.2% in 2018.
This is significantly lower than the government’s 5.4% target as per its National Development Plan 2030.
With an unpredictable domestic political context and still unfavourable commodity prices, the ratings agency also expects reduced investor and consumer confidence to lead to sluggish economic growth, which will weaken banks’ revenues and loan quality.
“The challenging operating environment — characterised by weak consumer and investor confidence and rising unemployment – will suppress business opportunities and loan demand, and exert pressure on banks’ loan quality,” it said.
“Over the next 12 to 18 months, Moody’s expects South Africa’s weak economy to pose a challenge to the performance of bank loans. Although impaired loans are at historical low levels at only 2.9% of total loans as of May 2017, the impaired ratio is forecast to trend upwards during 2017-18 towards 3.5% because impaired loans will rise at a faster pace than gross loans.
“However, South African banks maintain relatively satisfactory capital buffers that provide room for loan growth and protection to creditors in our base case scenario. South African banks’ have also increased their exposure to corporates compared to households, which has benefited their asset risk,” it said.
Moody’s indicated that the banks’ profitability will weaken marginally over the outlook period, reflecting restrained business growth, contracting margins and increased provisioning requirements.
It also expects subdued GDP growth and rising competition to curb banks’ pricing power this year, particularly in the corporate segment, driving down revenue growth, it said.