Dec 10, 2012
Limassol, December 5th 2012 – The outlook for South Africa's banking system has been changed to negative from stable, says Moody's Investors Service in a new Banking System Outlook published today. The ratings agency says that the drivers of the outlook are (1) weak macroeconomic conditions that will elevate credit risks and pressure banks' asset quality and profitability metrics; (2) sizable holdings of government securities that will continue to link the banks' credit profiles to South Africa's creditworthiness (Baa1 negative); and (3) the banks' increasing reliance on short-term wholesale deposits, which underpin structural funding challenges that are likely to be exacerbated by Basel III's funding requirements.
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.
The operating environment in South Africa will remain challenging for banks. In Moody's view, South Africa's real GDP will grow at about 2.5% in 2012 and 3% in 2013 (Moody's Country Statistics: South frica, 30 November 2012) below the rates needed to fully-utilise manufacturing capacity, tackle high unemployment and substantially improve living standards. As a result of the weakened domestic environment, the rating agency expects credit growth and new corporate business opportunities for banks to remain subdued over the 12-18 month outlook period. This, in turn, will exert additional pressure on the banks' asset quality and bottom line.
Moody's says that a key credit driver will be the banks' sizable holdings of government securities, accounting for more than 150% of system Tier 1 capital on average for the largest banks. These exposures will continue to link bank credit profiles to the sovereign's creditworthiness, which is under pressure from economic and fiscal headwinds. In addition, weaker economic growth and the seasoning of the unsecured retail loans will likely exert upwards pressure on non-performing loans (NPLs), which stood at 4.4% of gross loans as of August 2012 following an improvement over the last two years.
In Moody's view, the banks will continue to face structural funding challenges because of the high level of disintermediation in South Africa and their high, and increasing, dependence on local wholesale institutional deposits (mainly from money market funds, insurance companies, and pension funds). This leads to short-term liability maturities, causing large asset-liability mismatches, higher funding costs and high deposit concentrations. The introduction of Basel III liquidity requirements will further exacerbate this dynamic, especially as the net stable funding ratio (NSFR) requires banks' longer-term funding to match long-term assets.
Moody's says that these negative pressures are only partly mitigated by banks' resilient core earnings generating capacity, and the rating agency's expectations that the banks will maintain their capital buffers ahead of Basel III implementation. Despite Moody's negative view on asset quality, the rating agency expects system capitalisation will likely remain sound at around current levels over the outlook period, with an overall Tier 1 ratio of 11.99% and an equity-to-assets ratio of 7.13% as of August 2012. This reflects Moody's expectations that (1) capital buffers are unlikely to be materially compromised by the magnitude of asset-quality deterioration; and (2) banks will retain the bulk of their earnings to enhance their capital positions in anticipation of stringent Basel III requirements.
Re-disseminated by The Asian Banker