The outlook for South Africa’s banking system remains stable, Moody’s Investors Service said in its Banking System Outlook published on Tuesday.
The report expresses Moody’s expectations for the fundamental credit conditions in the banking system over the next 12 to 18 months.
The key drivers of the outlook are the continuation of benign macroeconomic conditions, the stabilisation in non-performing loans (NPLs), solid capital buffers and sustainable profitability, Moody’s said.
These supportive features are balanced against funding and liquidity challenges, owing to a reliance on short-term wholesale deposits, the elevated — although improving — credit risks from the retail segment and subdued loan growth.
Moody’s expects South Africa’s economy to grow by 3.2% in 2011 and around 3% in 2012, compared with 2.9% in 2010 and 1.7% in 2009. Due to low interest rates and manageable inflation levels, borrowers’ debt-servicing costs have declined while consumer debt affordability has increased.
Profitability sustained
The improved operating conditions in the last two years have had a positive impact on the banking sector’s performance with almost all rated South African banks registering improved results in 2010 and 2011, owing mainly to lower provisioning costs. Moody’s believes that profitability will be sustained despite subdued credit growth over the outlook period.
“In the context of benign operating conditions we also expect the current level of system NPLs, at around 5.5% of gross loans, to remain stable due to tighter lending criteria and gradual consumer deleveraging. As such, any major asset-quality deterioration is unlikely over the next 12 to 18 months,” the ratings agency noted.
The South African banking sector’s balance sheet is solid with an overall Tier 1 ratio of 12.07% and an equity-to-assets ratio of 7.15% as of June 2011. South African banks also have a sizeable buffer to absorb liquidity pressure as the system’s loans-to-deposits ratio has improved, down to 93% in June 2011 from 100% in March 2008 while liquid assets are above the current regulatory requirements.
Moody’s believes that banks’ relatively high liquidity levels will be maintained in the context of low credit demand and in anticipation of stricter regulation.
Moody’s foresees stable asset quality and profitability metrics over the outlook period, however, the pressures of high unemployment (25%), retail credit risks and high consumer indebtedness mean that these metrics will not return to pre-crisis levels.
‘Trapped’
The banking system’s dependence on wholesale deposits from corporates and money market funds creates structural funding and liquidity challenges.
Deposit concentrations are therefore relatively high, while higher funding costs and a short maturity of liabilities lead to large mismatches in the maturity profile of assets and liabilities. Moody’s says that South African banks will find it difficult to meet the proposed new liquidity standards under Basel III in their current form.
Existing exchange controls and restrictions, however, ensure that rand liquidity remains “trapped” within the domestic financial system — this provides a degree of protection for the South African banking sector during financial market volatility.
“The stable banking system outlook speaks to the intrinsic credit fundamentals of the system and is consistent with the stable outlook assigned to the stand-alone financial strength ratings for nearly all rated South African banks,” it said. — I-Net Bridge