SA's banks will get a fillip from 1Q rate cut

After two tough years, South African banks are likely to start lending more freely, BMI Research said in a note emailed on Friday. Though the Reserve Bank's monetary policy committee (MPC) voted to hold its repo rate at 6.75% on Thursday, BMI said it still expected an interest cut during the first quarter of 2018 - implying a cut to 6.5% at the MPC's next vote on March 28.

"Commercial banks had a difficult 2017 following a slowdown in the economy, with annual credit growth having fallen to a seven-year low in February, coming in at just 0.8% year on year," BMI said. "However, with the economy showing signs of recovery and our expectation of another interest rate cut from the Reserve Bank in the first quarter of 2018, we believe credit growth will return to previous levels, coming in at 8% by year-end 2018."

Weak economic growth and rising nonperforming loans in the first half of 2017 prompted banks to focus on safer assets that yield lower returns, such as government debt. BMI said the slight improvement in SA's economy this year should lead banks to resume lending to higher-risk borrowers.

But the research firm's bullish outlook on South African banks came with the caveat that it expected things to turn tough again in about two years. BMI said that while base effects would flatter credit growth now, this would not be enough to sustain a high headline figure in 2019, when it expects a lack of progress towards economic reform to curtail appetite for investment, subsequently bringing client loan growth in the commercial banking sector back down to 5%.