‘Robust profitability’ for SA banks in 2018, says S&P

S&P Global Ratings outlook for South African banks remains stable, with robust profitability and sound capitalisation expected in 2018. However, concerns over high household leverage and strained affordability remain.

“We still believe that domestic households pose the greatest source of risk for South African banks, because of their relatively high leverage and low wealth levels compared with those of other emerging markets,” the ratings agency said.

There has, however, been an improvement in leverage and affordability by households, S&P said in a note comparing local banks to their Brics and emerging market peers.

Credit losses are expected to be stable with the top-tier banks expected to register losses of between 0.7% and 1%. Low-tier banks and unsecured consumer lenders are expected to register marginally higher credit losses.

While the ratings agency notes an improvement in household position, it has expressed concern about corporates. “We see possible deterioration in the quality of corporate loan books due to the rising leverage for the past five to ten years (averaging around 10% per year) and weaker profitability.”

It expects the South African economy to grow by 1% this year and by 1.7% in 2019. While such forecasts are weak it expects renewed business and household confidence, brought about by an improved political environment and investor sentiment, to provide some upside. “We believe the cycle is currently at the bottom, but the speed at which growth returns will depend on policy shifts and building of confidence.”

S&P notes that investor sentiment is being driven, largely, by expectations that new president Cyril Ramaphosa will reduce corruption and executive mismanagement, which it termed the “root cause of the country’s dramatically weak growth”.

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