News
South African banks face growing credit risks as the economy slows, report says
South African banks face profitability pressures over the next few years amid a weakening economy and rising credit risks, says Standard & Poor’s Ratings Services in a report published on 28 April 2016.
“The outlook on all banks we rate in the country turned negative at the end of 2015, reflecting the negative outlook on the sovereign, the prospect of slower economic growth, rising interest rates, and inflationary pressures on the banking system’s asset quality,” said Standard & Poor’s credit analyst Matthew Pirnie.
We expect top-tier banks will face credit losses on their lending activities ranging between 0.9% and 1.2% in 2016, worsening by another 20 basis points in 2017.
Elements of market dislocation are also entering South Africa’s banking system, with one bank up for sale, another likely to be divested, the re-entry of one bank from resolution, and a fourth bank shaking up mass market retail banking in the country.
South African banks’ expansion into other parts of the continent also appears less attractive in 2016 than over the past few years, which is likely to limit appetite for growth and raise credit costs. Consequently, banks’ strategic focus is likely to turn defensive rather than expansionary.
Nevertheless, funding pressures on banks have eased a little due to the proposed regulatory discretion on the requirements on banks of net stable funding ratio (the proportion of long-term assets which are funded by long-term, stable funding).
However, we expect the restructuring of funding will continue, albeit at a slower pace. We still consider short-term concentrated wholesale funds to be a common idiosyncratic risk for most of the banks in the sector. Yet, systemic risks are lower than in other emerging markets because of the closed rand system and minimal reliance on external and hard currency funding.
“We expect that changing funding profiles, regulatory changes, and rising credit costs will place pressure on the industry’s profitability in 2016 and 2017, despite the endowment effect from increasing interest rates,” said Mr. Pirnie.
