Credit ratings agency Moody’s Investors Service expects profits in the South African banking system to wane over the next year-and-a-half as low growth, and weak consumer and investor confidence, which are not expected to improve, take their toll on the sector.
Moody’s has projected SA’s real GDP at 0.5% in 2017, growing to 1.2% in 2018.
Both forecasts are less than the Treasury’s projections of 1.7% and 2%, respectively.
Moody’s forecasts are in line with the Reserve Bank’s.
“Our negative outlook for South Africa’s banking system is mainly due to the weak operating conditions, which will challenge banks’ loan quality and profitability,” said Nondas Nicolaides, a vice-president at the ratings agency.
Reserve Bank filings show that banks are not signing on many new loans.
By June, all banks registered with the Bank supervision department collectively had R3.78-trillion in gross loans and advances to customers — just 2.1% more than 2016. It represents a significant drop from the 7.5% growth in loans from June 2015 to June 2016.
The four largest banking groups, whose South African arms Moody’s rates, reported 1%-5% growth in their loans and advances during the banking sector’s recent reporting period.
Moody’s expects loan growth to remain low in 2017 and 2018 due to weak demand, especially following a deceleration in mortgage advances during the first quarter.
Reserve Bank data show fewer commercial mortgages were written by March compared with the previous matching period’s, while home loans were marginally higher.
The ratings agency said that by May loan growth rates had reached their lowest level in more than five years. This is expected to increase impairments — loans identified as unlikely to be repaid and budgeted for accordingly.
“Over the next 12-18 months, we expect the performance of bank loans will be challenged by SA’s weak economy, which will strain borrower cash flows and make it more difficult for borrowers to manage loan repayments,” said Moody’s.
“Although impaired loans are at historical low levels at only 2.9% of total loans as of May 2017, the [impairment] ratio is forecast to trend upwards during 2017-18 towards 3.5% because impaired loans will rise at a faster pace than gross loans,” it said.
South African banks have shifted their exposure to corporate entities, with corporate loans as a proportion of GDP surpassing household loans for the first time since 1994 in December 2016.
Corporate loans now accounted for about 35% of GDP, Moody’s said.
“Total corporate exposure comprised around 37.6% of total exposures as of March 2017, from 31.5% in 2010, while retail exposure fell to around 34.4% from 42% over the same period,” the agency said.
“This change in asset mix has slowed formation of new problem loans because corporates have lower debt levels and stronger cash flows than households, and have ample headroom to maintain loan repayments even during difficult times,” it noted.
But low economic growth threatens corporate entities’ repayment ability, with small and medium-sized enterprises most at risk.
Adrian Cloete, a portfolio manager at PSG Wealth, said that bad debts and credit losses at the big four banks were unlikely to improve from the current “very benign levels”, an indication banks would struggle in this aspect.
“Banks are likely to show positive earnings growth in the next six to 12 months, but at a lower rate than the last few years,” Cloete said.