Banking sector to remain stable
Flags highly-leveraged households as a threat to banks.
Standard & Poor's expects the South African banking industry to remain stable in the face of sluggish economic growth and heightened political risks. But, it has flagged the highly-leveraged households and low wealth levels as a major threat to domestic banks.
The ratings agency, in its latest Banking Industry Country Risk Assessment, said a significant deterioration in local banks profitability or funding profiles is unlikely. “If the banks become more reliant on more volatile funding, or change to a net debtor position, we could lower our assessment.”
It downgraded the nation's banks to sub-investment grade in April 2017 following a sovereign downgrade, spurred by a late-night cabinet reshuffle which resulted in major changes at the National Treasury.
It also labelled threats to the South African Reserve Bank's (Sarb) independence from political interference as negative for the institutional framework of banks but said that they were unlikely to materialise anytime soon.
The market has perceived Public Protector Busisiwe Mkhwebane's order that the Sarb's constitutionally mandated objectives be changed as well as calls, from the ANC National Policy Conference, for the Sarb to be nationalised as threats to the central bank's independence.
Despite on-going low growth and political instability domestic banks continue to perform well. It said credit impairments improved to 1.26% of total loans in the year to March 31 2017, from 1.44%. Over the same period, capital adequacy in the banking sector improved to 16.05% from 13.88% while return on equity increased to 17.33% from 16.31%.
“Nevertheless, [the] banking sector's growth has been low, mimicking that of the wider economy. We expect real GDP growth to be limited to 1% in 2017, but we think there will be a slight acceleration to an average of 1.5%-2.0% per year over 2018-2020,” it said.
S&P research found that South Africa's economic risk profile is similar to that of its emerging market peers, including Brazil, India, Turkey and China.
South Africa's relative weakness is underpinned by highly-leveraged domestic households, low wealth levels and lower than expected economic and GDP growth per capita.
S&P continues to believe that households are “the most significant source of risk” for domestic banks. Household debt-to-disposable income fell from 85% in 2008 to 74.4% in 2016. But the ratings agency expressed concern about the changing nature of leverage from secured residential mortgages to increased unsecured and instalment credit. It said the relatively quicker deleveraging of the wealthy market compared with the middle- and lower-income markets coupled with a tightening of credit policies, which restricted access to long-term secured credit and favoured shorter-term, higher-margin loans, underpinned the change.
“As a result of this and due to pressure on disposable income from slower real-wage growth versus inflation, we believe that general household affordability has weakened, despite the decline in household leverage.” S&P added that weaker household affordability has been driven by modest interest rates and inflation – two factors which, barring any shocks, are unlikely to rise over the next 12 to 18 months.
Drawing on the mid-2014 failure of African Bank, “which caused limited market dislocation, with cost of funds rising moderately for around one week and then returning to normalised levels”, it said the oligopolistic nature of the banking industry underpins market stability. It added that African Bank's failure was isolated and largely due to the “questionable” purchase of a furniture retailer as well as aggressive loan expansion in a time of credit and liquidity stress and inadequate provisioning for high-risk loans.
It counted improved provisioning by banks as well as limited exposure to non-domestic risks, very little exposure to external funding as well as South Africa's relatively broad and deep debt capital markets as positives for domestic banks.
MONEYWEB
The ratings agency, in its latest Banking Industry Country Risk Assessment, said a significant deterioration in local banks profitability or funding profiles is unlikely. “If the banks become more reliant on more volatile funding, or change to a net debtor position, we could lower our assessment.”
It downgraded the nation's banks to sub-investment grade in April 2017 following a sovereign downgrade, spurred by a late-night cabinet reshuffle which resulted in major changes at the National Treasury.
It also labelled threats to the South African Reserve Bank's (Sarb) independence from political interference as negative for the institutional framework of banks but said that they were unlikely to materialise anytime soon.
The market has perceived Public Protector Busisiwe Mkhwebane's order that the Sarb's constitutionally mandated objectives be changed as well as calls, from the ANC National Policy Conference, for the Sarb to be nationalised as threats to the central bank's independence.
Despite on-going low growth and political instability domestic banks continue to perform well. It said credit impairments improved to 1.26% of total loans in the year to March 31 2017, from 1.44%. Over the same period, capital adequacy in the banking sector improved to 16.05% from 13.88% while return on equity increased to 17.33% from 16.31%.
“Nevertheless, [the] banking sector's growth has been low, mimicking that of the wider economy. We expect real GDP growth to be limited to 1% in 2017, but we think there will be a slight acceleration to an average of 1.5%-2.0% per year over 2018-2020,” it said.
S&P research found that South Africa's economic risk profile is similar to that of its emerging market peers, including Brazil, India, Turkey and China.
South Africa's relative weakness is underpinned by highly-leveraged domestic households, low wealth levels and lower than expected economic and GDP growth per capita.
S&P continues to believe that households are “the most significant source of risk” for domestic banks. Household debt-to-disposable income fell from 85% in 2008 to 74.4% in 2016. But the ratings agency expressed concern about the changing nature of leverage from secured residential mortgages to increased unsecured and instalment credit. It said the relatively quicker deleveraging of the wealthy market compared with the middle- and lower-income markets coupled with a tightening of credit policies, which restricted access to long-term secured credit and favoured shorter-term, higher-margin loans, underpinned the change.
“As a result of this and due to pressure on disposable income from slower real-wage growth versus inflation, we believe that general household affordability has weakened, despite the decline in household leverage.” S&P added that weaker household affordability has been driven by modest interest rates and inflation – two factors which, barring any shocks, are unlikely to rise over the next 12 to 18 months.
Drawing on the mid-2014 failure of African Bank, “which caused limited market dislocation, with cost of funds rising moderately for around one week and then returning to normalised levels”, it said the oligopolistic nature of the banking industry underpins market stability. It added that African Bank's failure was isolated and largely due to the “questionable” purchase of a furniture retailer as well as aggressive loan expansion in a time of credit and liquidity stress and inadequate provisioning for high-risk loans.
It counted improved provisioning by banks as well as limited exposure to non-domestic risks, very little exposure to external funding as well as South Africa's relatively broad and deep debt capital markets as positives for domestic banks.
MONEYWEB
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