Picture: REUTERS
Picture: REUTERS

The profitability of SA’s seven-largest commercial banks should remain resilient through the course of 2020, despite low business confidence and stagnant income growth for SA citizens, Moody’s Investors Service said on Tuesday.

While subdued growth will constrain the growth of balance sheets for SA banks and reduce loan growth, capital will remain resilient and comfortably above regulatory minimums over the next 18 months, Moody’s said in its latest banking system report for SA.

“Profitability will stay firm despite slow business growth,” said Moody’s senior credit officer, Akin Majekodunmi.

“Net interest income, banks’ main revenue source, will come under pressure because of lower loan growth, but we expect digital investment costs to reduce over the next 12 months,” he said.

JSE-listed banks have underperformed so far in 2019, falling 3.95%, compared with a 4.53% rise in the local bourse.

Illustration: DOROTHY KGOSI
Illustration: DOROTHY KGOSI

Some major banks have single-digit revenue growth so far in 2019 amid a subdued economy, and have also flagged the risks of the National Credit Act to future revenue.

The act, which provides relief to heavily indebted consumers, has been described as “unsustainable” by the Banking Association of SA.

Nedbank has been the worst-performing bank in the year to date with a 16.4% slump. It includes a 6.28% loss in August, when it reported that interim headline earnings grew 2.6% to end-June.

The earnings growth at major banks is likely to slow somewhat in the next year, as bad debts rise from their relatively low levels, said Sanlam Private Wealth investment analyst Renier de Bruyn, adding that he agrees with Moody’s that banks should remain resilient from a capital and liquidity point of view.

Net interest margins will decrease due to increased competition and a lower repo rate, he said.

“Transaction volumes will also be constrained by the weak economy. This should be somewhat offset by a tight focus on costs by the banks as they optimise their branch networks and leverage off their investment in digital capabilities,” De Bruyn said.

Banks’ returns on assets should remain roughly in line with their 2018 performance at 1.8% to end-2020, the agency said.

Problematic loans should rise marginally from 3.7% during that period, but remain below 4%.

Moody’s expects SA to experience GDP growth of just 0.7% in 2019 and 1.5% in 2020, too low to meaningfully reduce unemployment or support per capita income growth.

“We expect the government to continue to pursue reform policies that attempt to stimulate growth,” Moody’s said.

Banks have been able to eke out some earnings growth sustainably in a very tough economic environment, which shows their resilience, said Mergence Investment Managers analyst Nolwandle Mthombeni. The declining share price thus has more to do with them being a proxy for SA’s economy than their individual performance, she said.

“Overall I agree that banks are the most resilient but there’s not much more they can do without a growing economy,” Mthombeni said.