Stable credit-rating outlook for SA banks

The creditworthiness of the South African banking system as a whole remains stable despite the socio-economic pressures it faces, global rating agency Standard & Poors (S&P) has concluded in its latest report on the country.

South Africa’s sovereign credit rating from S&P currently stands at BBB (long-term foreign currency rating), with a stable outlook.

“Given the current strength of the South African banking sector and supportive government, future challenges and opportunities arising from the changing socio-economic landscape and the need to integrate historically disadvantaged South Africans (HDSAs) into the formal economy and the banking sector should not result in heightened risk profiles,” S&P said in a report released on Wednesday.

The report, a risk analysis of the South African banking industry, concludes that the banking sector’s financial performance continues to prosper despite moderately paced gross domestic product (GDP) growth, as well as declining inflation and interest rates.

The major South African banks have benefited from improved household and business confidence, and wealth dynamics.

The sector’s asset quality has improved and credit demand, especially from households, has increased due to the benign credit environment, superior debt serviceability and lower borrowing costs. In turn, sustained revenue diversification, credit volumes and cost control have supported “satisfactorily trending” profitability, despite narrowing margins.

System capitalisation is considered adequate to support the current risks as well, S&P said. Nevertheless, in its view, performance problems at Nedcor have demonstrated the need to maintain a sufficient capitalisation cushion in a still-challenging operating environment.

The failure of several small and mid-tier banks during 2001/02 highlighted the fragility of customer confidence outside of the dominant banking groups, with the ensuing flight to quality consolidating the “big four” banking groups’ hold over the system.

Still, S&P says, the prospective purchase of a majority stake in Absa by Barclays Bank (rated AA with a stable outlook) could “substantially change the competitive landscape of South Africa’s banking sector, if completed”.

Substantial changes will also stem from the government’s black economic empowerment (BEE) actions, the rating agency noted, which are aimed at broadening the provision of banking services.

However, S&P notes, deep social inequalities persist. Chronic unemployment, poor education, skills and job inequalities and massive social infrastructure requirements will all constrain medium-term economic wealth and deeper financial intermediation.

“With 31% of the population having little or no access to basic banking services, integration of these HDSAs into the banking sector requires balancing the stability of one of the mainstays of the economy with the government’s socio-economic objectives,” it says.

“S&P expects that the proactive stance taken by the dominant banks to meet the specific banking BEE challenges will mitigate these potential risks.”

In the area of economic risks, S&P points out that although the economic climate has stabilised in the country over the past decade, major impediments to higher growth and prosperity remain. GDP per capita, at $4 242, is relatively low, underlining the weak financial position of the vast number of HDSAs.

Initiatives to address inequalities and raise living standards across the whole of society require persistent economic momentum and financing for the immense social needs of citizens.

Regarding systemic risks, the rating agency noted that the lack of domestic savings—having fallen to 14,5% at September 2004 from 16,1% in 2002—remains a major obstacle to faster economic growth, given the absence of strong foreign direct investment inflows.

The country’s net external position is also a source of risk, as is the vulnerability of the free-floating rand, which indirectly exposes the banks to high foreign currency risk.

“Although only a small percentage of the banking sector’s assets are non-rand-denominated, active hedging strategies are required to moderate the impact of foreign exchange risk for those banks exposed to the rand’s volatility,” S&P says.

“The increased export orientation of South African manufacturers also raises the sector’s exposure to foreign exchange risk. Company debt servicing dependent no foreign revenue is showing signs of stress, despite an increase in global demand.”

At the end of 2004, South Africa had 21 registered banks, two mutual banks and 15 local branches of foreign banks. Banking system deposits totalled R1,032-trillion at December 31 2004, with deposits per capita standing at R21 914.—I-Net Bridge