Bad debts to eat away at South African banks' profits in 2021, Moody’s warns

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Credit ratings agency Moody's says South African banks are likely to battle with an increase in bad debts and low profits again this year as corporates struggle amid a shrinking economy, and households incomes are stretched in ways they've never been before.

Moody's released the local banking system outlook for 2021 on Thursday morning in which it said weakened corporates and households finances will dampen banks' financial performance.

The agency warned that the problem of non-performing loans will persists this year. Overall, operating conditions will also remain weak because of sub-par economic activity due to limited progress made on economic reforms.

In 2020, local banks battled with the highest level of credit impairments ever recorded in recent history. For most banks, their bad debt provision was higher than it was for the 2008/09 global financial crisis. They also reported some of the biggest fall in profits with Absa taking the crown for the biggest loser when its headline earnings fell by 93% for the six months ended in June 2020.

The local banks are yet to present their financial results for the 2020 full financial year but Moody's said non-performing loans for the whole industry reached 5% of gross loans in November 2020.

"We expect loan performance to deteriorate in 2021, with problem loans to continue rising beyond the 5% of gross loans reached in November 2020, as both corporate and household balance sheets are stretched by weaker profits and disposable income," said Constantinos Kypreos, Senior Vice President at Moody's Investors Service.

Even then, the agency expects our banks to remain stable, thanks to stable funding, good liquidity and capital buffers that they've built over the years. This is in line with the SA Reserve Bank's expectations. The Bank said in November that local banks remained in strong position and would be adequately capitalised, even if their non-performing loans increase over the coming months or the economy take a more severe downturn.

"[The] banks' good risk management, low interest rates and government support measures should help contain the deterioration and keep non-performing loans at single-digit levels," said Kypreos.

He said lower dividend pay-outs and other capital enhancing measures will help maintain capital metrics at current levels. Most banks chose to withhold dividends in 2020 but Investc paid an interim dividend.

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