Cape Town - International ratings agency Moody’s has maintained its negative outlook for the South African banking system, saying that projected sluggish GDP growth and an “unpredictable domestic political context” would weaken banks' loan quality and profitability.
Moody's released a new 22-page report - "Banking System Outlook - South Africa" - on Monday. It said weak operating conditions were driving its negative outlook.
Moody's analyst and co-author of the report Nondas Nicolaides said in a statement that SA GDP growth was expected to remain low for the remainder of 2017.
He said Moody's expects subdued GDP growth and rising competition to curb banks' pricing power this year, particularly in the corporate segment, driving down revenue growth.
Despite the announcement by Statistics South Africa last week that SA GDP had shown 2.5% growth for the second quarter of 2017, Moody’s has forecast real GDP growth of only 0.5% for South Africa in 2017, rising to just 1.2% in 2018.
It noted that this was “still significantly lower than the government's 5.4% target” set out in the National Development Plan 2030.
In addition to low GDP growth, Moody's noted that SA banks were operating in an “unpredictable domestic political context”, with unfavourable commodity prices, weak consumer demand and still-rising unemployment.
“Over the next 12 to 18 months, Moody's expects South Africa's weak economy to pose a challenge to the performance of bank loans,” it said.
The report’s authors also stated that domestic political events were “raising uncertainty about economic policy outlook, damaging investor and business confidence”.
The ratings agency did however note that the South African banking sector exhibited some strengths.
“South African banks maintain relatively satisfactory capital buffers that provide room for loan growth and protection to creditors in our base case scenario. South African banks have also increased their exposure to corporates compared to households, which has benefited their asset risk,” it said.
The report covered seven commercial South African banks, which together accounted for around 91% of banking sector assets as of December 2016. These include Standard Bank of South Africa, FirstRand, ABSA, Nedbank, Investec, Mercantile Bank and Bidvest Bank.
The average standalone Baseline Credit Assessment, or BCA, and the average long-term bank deposit rating for these banks is Baa3.
Moody’s had downgraded the long-term local and foreign-currency deposit ratings of five of the country’s largest banks to Baa3 in June 2017, citing the “challenging operating environment in South Africa, characterised by a pronounced economic slowdown, and weakening institutional strength”.
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