South African banks will largely be at the mercy of improving governance in the state in the coming quarters when it comes to their performance.

Constrained private sector credit growth will continue to weigh on banks through 2019, but should be partially offset by the growing need for local banks to finance government deficits as investor demand for bonds drops off, according to ratings agency BMI Fitch.

On Friday Fitch downgraded its outlook for South African bank asset growth for 2018, saying assets should only grow 6% year on year in 2018, from a previous forecast of 7%. Weaker than expected economic growth and tightening monetary policy were cited as reasons.

Improved sentiment accompanying Cyril Ramaphosa’s rise to the presidency in February 2018 had not yet translated into increased investment or demand for credit, said Fitch. Private sector credit expanded by a relatively lacklustre 2% in March, compared to the same month in 2017.

"Though we expect that progress towards implementing more business-friendly reforms will yield a modest uptick in investor sentiment, we believe that first-quarter economic data is indicative of how slow this process will be," said Fitch.


Growth in lending to the government has consistently outstripped growth in lending to the private sector since mid-2014, and will continue to do so.

"The banking sector’s stock of Treasury instruments increased by 14% in March 2018 and we believe that continued wide deficits will help to support growth in lending to the government going forward," Fitch said.

SA’s banks have been battered by a depreciating rand so far in 2018, as global monetary tightening reduces liquidity, while trade-war concerns have also put a damper on sentiment.

The JSE’s bank index has lost 4.97% so far in 2018, compared to a 5.28% drop in the all share.

The sharp fall in the rand, and global economic factors have brought forward expectations that the Reserve Bank would move to raise rates to protect the local currency.

Sentiment had improved in SA, while there had already been some progress in terms of credit to the state, a notable example being the signing of renewable energy agreements with independent power producers, said Patrice Rassou, head of equities at Sanlam Investment Management.

While the inflation outlook was to the upside, the Reserve Bank was likely to wait for inflation to become entrenched before adopting a tightening bias, said Rassou.

This was due to SA’s modest economic performance.

A rising interest rate cycle posed a risk, but a significant rate hike of between 300 and 500 basis points was not likely at this stage, said Harry Botha, an analyst at Avior Capital Markets.

"I think policy certainty in a couple of sectors is very important to improve confidence. Credit growth in SA will also probably improve after the elections next year, when public-sector entities start their investment cycle again," said Botha.

Fitch on Friday kept its risk-profile of banks in SA unchanged, but noted a modest decline in loan-to-deposit ratios was likely in coming years.

Asset quality remained notably stronger than over the past five to 10 years, while relatively easy monetary policy and the end of the recent severely dry weather in SA would be likely to reduce the pressure on asset quality and make it easier for borrowers to pay their obligations, Fitch said.