SA banks under pressure in 2018 – but will endure: S&P Global

Ratings agency S&P Global has published its South African Banking outlook for 2018, providing an overview of how local finance groups are performing in less-than-certain times.

According to S&P, the South African banking sector has started the year facing the same risks as 2017 – though a much more positive air is about thanks to the recent political shifts in the country.

Specifically, South Africa still faces weak economic growth, ongoing political noise (but with positive signs of change), and state-owned enterprises with significant liquidity and governance problems that continue to restrain business, investor, and retail confidence.

This, S&P said, will invariably impact the banking sector and will delay any strong recovery in the markets.

“However, South African banks are likely to withstand these challenges thanks to their strong credit standings compared with that of the sovereign,” S&P said.

“South African banks have been extending credit slowly and with increasing conservatism, while simultaneously building capital and loan loss provisions, thanks to the sector’s longstanding robust profitability.

“Even the funding and liquidity fundamentals appear more solid for the domestic banks than they did five years ago, with early compliance with the Basel III ratios seemingly no longer an issue. Furthermore, and more importantly in our opinion, South African banks are less exposed to external factors than their emerging market peers,” the ratings firm said.

South Africa problems

Despite the more positive position the banking sector finds itself in, it is still heavily impacted by the greater economic troubles of the country.

Since 2015, South Africa has not been creating jobs on a net basis. With the population increasing at an annual pace of around 1.6% per year, South Africa’s rate of unemployment has increased to an estimated 28% as of the second quarter of 2017 from 25% three years ago, the group noted.

Because of this, S&P says that domestic households still 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”.

“Positively, we have seen an improvement in the fundamental health of domestic households in South Africa. Firstly, household debt to disposable income of households is on an eight-year improvement streak. By end-2018, we expect it to be around 72.5%, down a full 13% since its peak in 2009.”

Further, it anticipates that debt serviceability to disposable income will improve.

S&P also noted that the election of Cyril Ramaphosa as the ANC’s next president has boosted consumer and business confidence, and put the political narrative on a more positive path. It said the banking sector was quite resilient to the negative political landscape however.

The health of SA banks

Looking at the South African banks, with the exception of African Bank, all finance houses are seen having a moderate to strong business position, and an adequate risk position. Capital and earnings are also performing well, S&P’s data showed.

Funding and liquidity – which was thrust into the spotlight this week in Capitec’s case – is also adequate among all banks except African Bank.

Capitec, in particular drew a special response from S&P earlier in the week, in which the ratings firm said its position on the bank had not changed.

“Our ratings on the bank continue to reflect those on South Africa (foreign currency BB/Stable/B), as well as the bank’s strong capitalization and conservative reserving, which is appropriate for high normalized credit losses. We also factor in the bank’s good earnings stability for a monoline unsecured consumer lender,” S&P said.

Read: Capitec gets S&P backing

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SA banks under pressure in 2018 – but will endure: S&P Global