SA banking system: Resilient financials amid a weakening economy drive our stable outlook, says Moody’s

Moody’s says in its outlook on the SA banking system issued today:

We have changed our outlook for the South African banking system to stable from negative, reflecting our assessment that the banks’ financial metrics and creditworthiness will remain resilient over the next 12 to 18 months, despite weakening operating conditions.

Slow economic growth will hold back the banks’ new business and revenues. Amid weak consumer spending, emerging market currencies volatility and inflationary pressures, we expect economic growth to remain weak. We forecast real gross domestic product (GDP) growth of just 0.7%-1% in 2018 rising to 1.5% in 2019 from 1.3% in 2017, lower than the government’s budget growth forecast of 1.5% in 2018 and 1.7% in 2019.

Credit quality will be sustained and capital will remain strong. We expect banks’ credit risk profile and problem loans to remain broadly stable to the end of 2019. Impaired loans stood at 3.5% of gross loans systemwide in June 2018. South African banks report solid capital metrics well above regulatory minima, and our central scenario is that capital buffers will remain resilient and protected by profits. The average common equity Tier 1 ratio was 12.8% as of June 2018, with a Basel III leverage ratio of 6.6%.

Funding and liquidity conditions will be stable. Institutional short-term deposits are an important source of funding for South African banks, and this will make meeting Basel III’s net stable funding ratio (NSFR) next year a challenge. However, banks have built good liquidity buffers in recent years, while limited use of foreign-currency funding also supports their funding profiles.

Profitability will be strained by slow business growth and higher costs. Banks’ revenues will be pressured by subdued business opportunities and increased operating expenses. Net interest income is likely to come under modest pressure because of lower loan growth, while increased staff and digitalisation costs will create a drag on net profitability. We expect banks’ return on assets in 2018-19 to be marginally lower than the 1.4% reported in June 2018.

Our government support assumptions will remain stable with no rating uplift for the banks. A formal bank resolution framework will be in place within the next 12 months, introducing bail-in for certain creditors in a bank insolvency. Once the resolution regime is operational, we will consider applying our advanced loss given failure (LGF) analysis to all rated South African banks, which could benefit their deposit and senior debt ratings.

Nondas Nicolaides, a Moody’s Vice President – Senior Credit Officer.

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