SA banks to be the least affected by the Russia-Ukraine war among emerging markets – S&P report

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S&P Global says South African banks will dodge most of the bullets fired by the Ukraine-Russia war. Local banks are likely to be among the least affected in emerging markets.
S&P Global says South African banks will dodge most of the bullets fired by the Ukraine-Russia war. Local banks are likely to be among the least affected in emerging markets.
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  • S&P Global released a report looking at the Middle East and African banks' exposure to the Russia-Ukraine conflict.
  • It says South African banks will remain relatively insulated, and they are likely to be among the least affected among emerging markets peers.
  • Even with lower economic growth than in 2021, S&P says local banks should still improve profitability.

Banks in Africa and the Middle East will dodge most of the bullets fired by the Ukraine-Russia war, according to ratings agency S&P Global.

In South Africa, local banks also fared better than their developed-world peers during the 2008/09 global financial crisis. 

And even during the Covid-19 pandemic, which initially caused a bloodbath across the JSE, local banks quickly bounced back as bad debts proved to be less than they feared.

READ | How SA's big 4 banks grew their combined earnings by 177% during a pandemic

S&P examined the Middle East and African banks' exposure to Russia and Ukraine. It said that in those two regions, only the Turkish and Tunisian banking sectors are most likely to suffer from negative indirect effects of the war. South African, Saudi, and United Arab Emirates banks will remain relatively insulated.

South African banks have limited or no vulnerability at all across all areas that S&P looked at. These include economic and credit growth, profitability, the quality of banks' assets, funding and liquidity.

"Among key emerging markets, South Africa's banking system is likely to be one of the least affected by the conflict. The country's economic reforms are taking shape, and banking sector performance has recovered quicker than anticipated," wrote S&P in the report.

But S&P does expect credit conditions to become tighter in South Africa too. The SA Reserve Bank has already raised interest rates twice in 2022. For this reason, S&P expects credit growth to remain muted in the country this year.

S&P has also revised SA's real GDP growth forecast for 2022 downward to 1.9%, well below the 4.9% in 2021. This is in the middle of what local banks are forecasting. For instance, Absa expects South Africa's GDP to grow by 2.1% in 2022. Standard Bank forecasts a 2% growth while Nedbank forecasts growth of only 1.7% – all below the National Treasury's 2.1%.

READ | 'Only risk, no growth': Nedbank CEO says SA is in big trouble as bank gives forecast for 2022

But even with lower economic growth, S&P expects local banks' credit losses to average 1% between 2022 and 2024. Even though the rising interest rate and subdued economic growth will affect households' finances, S&P expects South African banks' non-performing loan ratios to continue improving and get below 4% by 2023 from a high of about 4.5% in 2021.

Banks will also benefit from the interest rate up-cycle as this will increase their net interest margins. As far as other profitability measures are concerned, S&P said banks' return on equity and return on assets should also look much better than in 2021.

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