Sep 05, 2013
Limassol, September 2nd 2013 - The outlook for South Africa's banking system remains negative, says Moody's Investors Service in a new report published today. The outlook reflects (1) the sluggish operating environment, which will weaken asset quality and increase provisioning needs; (2) the banks' sizable holdings of sovereign securities, linking bank credit profiles to that of the government of South Africa (Baa1 negative); and (3) funding challenges due to reliance on short-term wholesale deposits. Moody's says that the banks' resilient core earnings-generating capacity and ample capital buffers partly offset these negative drivers.
The new report, entitled "Banking System Outlook: South Africa", is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.
Over the 12-18 month outlook period, in the context of sluggish economic growth Moody's expects that the poor prospects for exports and private consumption will limit banks' credit growth and new corporate business opportunities, and prompt a rise in non-performing loans (NPLs). Following a deceleration in GDP to 2% in Q2 2013, from 3.1% in Q2 2012, Moody's forecasts South Africa's real GDP to grow by around 2.2% in 2013 (2014: 3.2%), well below both the pre-crisis 2004-08 average of 4.9% and
the 4%-7% rate the government views as necessary to fully utilise manufacturing capacity, reduce high unemployment and improve living standards.
NPLs stood at approximately 4% of gross loans as of June 2013, with a marked deterioration in unsecured retail loans. As property prices come under pressure, indicated by house price indices, weakening collateral values will heighten the need to increase provisioning. The negative outlook for the banking system also takes into account the fact that credit and asset-quality profiles of South African banks are closely linked to the sovereign's creditworthiness, as holdings of government securities and loans to state-owned entities account for more than 150% of banks' Tier 1 capital, on average. Therefore, any deterioration in South Africa's credit profile (Baa1 negative) would exert downward pressure on the credit profiles of the largest banks.
Although government-exchange controls contain rand liquidity within the system, Moody's expects that South African banks will continue to remain highly dependent on local short-term wholesale deposits, which creates large asset-liability mismatches, high funding costs and deposit concentrations. As a result, South African banks will not be able to meet the proposed net stable funding ratio (NSFR) under the Basel III liquidity framework, although implementation is not due until 2018. However, as they continue to build up their core liquidity, Moody's expects that the banks will be able to maintain solid liquidity profiles, which will ease some of the risks stemming from the asset-liability
Moody's notes South African banks' resilient core earnings and ample capital levels that will limit to some extent the credit pressures noted above, providing an adequate absorption buffer for possible loan losses. Return on equity and return on assets for the system stood at 16.7% and 1.2% respectively in June 2013, while Tier 1 capital ratio was 11.8% with a common equity Tier 1 capital ratio of 11.2% as of June 2013. Although Moody's expects some modest pressure in banks' earnings over the outlook period, this is unlikely to compromise in any significant way their overall capital levels.
Re-disseminated by The Asian Banker