- GCR estimates that hospitality, tourism, and discretionary retail sectors only represent around 10% of the total loan books of SA banks
- The rating agency expects most of SA banks' credit losses to come from unsecured and semi-secured lending
- It says SA's banking system remains the most stable in the continent, even as the economy is expected to contract by at least 7%
South African banks, especially the big banks, will likely be shielded to some extent from struggles facing the tourism and hospitality sectors as they have limited credit exposure to these industries.
The latest banking sector report by credit rating agency, GCR, estimates that hospitality, tourism, and discretionary retail sectors only represent around 10% of the total loan books of SA banks. One bank that has publicly disclosed its credit exposure to different sectors, African Bank, told investors on Wednesday that about 28% of its loans were advanced to customers employed in the services sector. Of those customers, only 30% are graded as medium and high risk.
GCR said it views hospitality, tourism, and discretionary retail sectors as the most at risk because of lockdown restrictions.
But it still expects banks to suffer elevated credit losses, particularly smaller banks and those who lend to SMES or specialise in unsecured credit. This is because unsecured and semi-secured lending – which accounts for over half of total household liabilities – will likely be the major source of credit losses in the industry.
As result, the agency has lowered the South African Financial Institution sector risk score to 7.5 from 8. GCR says bigger banks, which have more diversified credit exposure, are expected to remain resilient. Still, the agency says given early indicators from these banks, their credit losses could increase by between 1.5% and 1.7% in 2020, while the rest of the sector is expected to record more than 2% growth in credit losses.
"GCR still believes these will be contained relative to other peer markets, given the underwriting track record and sophistication of the top tier South African banks," reads the report.
This is because the SA banking sector’s credit loss ratio compared favourably to other African countries, hovering at around 1% over the past two years. A separate report for the African continent shows that despite the worries about consumers' inability to service their debt right now, and the SA Reserve Bank's warnings that the country's financial system is under stress, South Africa's banking system remains the most stable. And for now, indications are that it should retain that crown even though the economy is expected to be weak for some time and likely to be outperformed by Kenya and Nigeria this year.
South Africa's banking sector benefited from prompt intervention by the SA Reserve Bank, which has cut interest rates by 275 basis points so far this year to help consumers manage to service their debts. The SARB also provided additional liquidity into the system by relaxing capital and liquidity requirements for banks and giving them some leeway when treating Covid-19 related impairments.
But interest rate cuts will eat into banks profitability and lower transaction volumes aren't helping the industry either, said GCR.