Moody’s Investors Service has revised its outlook for the South African banking system to negative from stable, it announced on Friday, reflecting its assessment that banks’ creditworthiness is likely to come under pressure in the next 12 to 18 months.
“The change in outlook is mainly due to the deteriorating operating conditions, which will challenge banks’ asset quality and profitability,” Moody’s said in its report.
The ratings agency cited subdued economic growth, rising interest rates and accelerating inflation as factors that will weigh on consumer spending, even as external demand for South Africa’s commodities exports remains weak and investment declines.
“In addition, the depreciation of the rand will continue to drive up the cost of imported consumer goods and industrial inputs, and drought conditions reduce agricultural output, all of which will weaken demand for bank loans,” Moody’s, which earlier this month confirmed South Africa’s credit rating at two notches above junk, said.
On May 6 the ratings agency confirmed South Africa’s credit rating at Baa2, which is equivalent to a BBB rating and one notch above Standard & Poor’s and Fitch.
“The confirmation of South Africa’s ratings reflects Moody’s view that the country is likely approaching a turning point after several years of falling growth; that the 2016/17 budget and medium term fiscal plan will likely stabilise and eventually reduce the general government debt metrics; and that recent political developments, while disruptive, testify to the underlying strength of South Africa’s institutions,” Moody’s said at the time.
Moody’s maintained a negative outlook – which it had already assigned in December – on SA’s credit rating, citing “implementation risks associated with the structural and legislative reforms that the government, business and labour recently agreed in order to restore confidence and encourage private sector investment.”
On Friday, Moody’s warned that domestic banks will face increased bad debt risks, as the repayment ability of consumers and some corporates comes under pressure.
With expectations that the sector’s non-performing loan (NPL) ratio will rise to around 4% by the end of 2017, from 3.1% in December 2015, Moody’s said that local banks’ “sufficient capital buffers” will insulate them from the elevated asset risks.
Banks’ profitability will come under pressure as a result of “lower business opportunities, higher costs and growing provisions” for loan losses.
Lending opportunities will be limited by the country’s “challenging environment”, Moody’s said. The agency forecasts GDP growth of 0.5% for South Africa this year.
“Our negative outlook for the banking system is consistent with the current negative outlook on the government rating and on the large banks’ ratings,” Moody’s said.
It rates eight commercial banks, which accounted for about 90% of the banking sector’s total assets at December 2015.
The JSE’s Banks Index was weaker by around 2% in afternoon trade, with Barclays Africa down the most of the major banks, losing 3.82%.
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