Picture: 123RF/RAWPIXEL
Picture: 123RF/RAWPIXEL

SA’s weak economic growth prospects will weigh on the performance of local banks in 2019, but this situation will be manageable, Moody’s Investors Service said on Monday.

Business opportunities and loan demand should be muted in 2019, but diversified revenue within SA’s largest banks as well as low levels of corporate debt mean the pressure on banks’ asset levels should be under control, Moody’s lead sovereign credit analyst for SA, Lucie Villa, said on Monday.

SA’s economy contracted 3.2% in the first quarter of 2019, much worse than expected, with Moody’s saying last week it expects SA to enter into a technical recession in the first half of the year. A technical recession refers to two consecutive quarters of contraction. Moody’s has revised its expected growth rate for SA from 1.3% in 2019, to 1%.

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This is expected to put pressure on the government’s finances, as finance minister Tito Mboweni had pencilled in 1.5% growth.

The weak growth will put additional pressure on SA’s five largest banks, which collectively make up 90% of banking system assets, Villa said on Monday.

“Banks are already competing for better-quality borrowers, and revenue is under pressure amid competition from new entrants and widespread migration to mobile and digital platforms by established players,” she said.

Picture: Moody's Investors Service
Picture: Moody's Investors Service

Despite this, SA’s banks have diversified revenue streams, which should help support profitability, Villa said. At a group level, Standard Bank and Absa derived 20%-30% of earnings in sub-Saharan Africa.

Although problem loans increased to 3.8% in April 2019 from 3.7% in December 2018, SA corporates had lower debt levels than their emerging market peers, and generally were able to remain loan repayments even in difficult times.

The JSE’s bank index has generally underperformed the JSE all share so far in 2019, amid volatility in the rand.

At 10.30am on Monday the index was up 1.25% compared with the all share’s 0.71%. The banks index has added 5.73% so far in 2019, compared with a 10.92% rise in the all share and a 12.13% rise in the JSE’s top 40 index.

gernetzkyk@businesslive.co.za