S&P: banks can absorb more state debt
Ratings agency S&P Global says that SA banks, which have assets valued at about 110% of GDP, have the capacity to absorb more of Pretoria’s ballooning debt pile.
The ratings agency said on Friday that the balance sheets of SA’s large banks mean they can take on more of the government’s debt.
“Banks’ holdings of government securities increased to about 15% of the sector’s total assets in 2023. Banks have the capacity to absorb additional government debt thanks to their liquid balance sheets and positive yields in real terms,” the agency said in its SA Banking Outlook 2024.
The exposure of the banks to government debt has risen sharply since 2015 — when exposure was less than 10% of the sector’s total assets — to 15% at present.
Reserve Bank data shows that growth in banks’ holdings of government bonds has far outpaced growth in total assets.
Foreign investors have been selling SA government bonds since 2019.
The Reserve Bank said last year in the financial stability report that the sell-off of government bonds by offshore money managers marked “a significant structural shift, especially considering the significant increase in government bonds issued during this period”. The central bank also expressed concern about the capacity of SA investors to continue absorbing new issuances of government bonds in future.
Business Day reported earlier in 2024 that the Banking Association SA said the warning by the Bank that a “high level of exposure to government debt by financial institutions represents a potential vulnerability” is one of the reasons the sector “cannot sit on the sidelines but must contribute whatever they can to reviving the SA economy and increasing the efficiency of the state”.
The National Treasury now expects gross government debt to stabilise at 77% of GDP by 2025/26.
The department said in November that it expects gross debt to rise from R4.8-trillion in 2023/24 to R5.2-trillion in the next financial year and to exceed the R6-trillion mark by 2025/26. The ratings agency expects the economy to record growth of less than 1% in 2023 and 1.5% in 2024. But it backs SA banks to withstand the economic headwinds.
“Credit conditions will remain tight in 2024, though inflation has slowed to 5.5% since June 2023,” said S&P credit analyst Samira Mensah.
“We expect inflation to average 5% in 2024, towards the top of the SA Reserve Bank’s 3%-6% target range,” said Mensah.
While S&P expects SA’s lenders to report a return on equity of 16% on average, it cautioned that it expects nonperforming loans to remain elevated in 2024.
“The private sector’s debt-absorption capacity is underpinned by moderate wealth levels stemming from a contraction in real GDP per capita in 2023, high unemployment and wide income disparities.
“Households’ disposable income will remain constrained by high interest rates and elevated food prices.
“We expect that the banking sector’s credit loss ratio will be higher than the historical low of 75 basis points, averaging 1.4% through 2024. Similarly, nonperforming loans will remain at about 4% of system-wide loans through 2025.”
SA’s banks responded to a surge in bad debts in 2024 by tightening their lending criteria as more and more consumers struggle to keep up with repayments due to 14-year-high interest rates and the high cost of living.
Capitec, which has 21-million customers, said in its interim results that it has put in place stringent credit-granting criteria in reaction to elevated levels of cash stress experienced by clients. Bad debt surged 62% to R4.7bn.
This is in line with impairments reported by other banks. Standard Bank’s credit impairment charges in the six months to June leapt 42% to R8.4bn.
Standard Bank also reported that its credit loss ratio, the amount of loan losses relative to its total loans, rose to 97bps, near the top of its target range of 70bps to 100bps.
In its interim results, Absa reported a 60% surge in total credit impairments to R8.3bn, while Nedbank’s impairment charge rose 57% to R5.3bn.
Confirming the low likelihood of a sovereign rating upgrade in 2024, S&P said: “Our ratings on banks will generally move in tandem with the sovereign ratings, but a sovereign upgrade is unlikely in the next 12 months. A negative rating action would arise if economic and governance reforms do not progress as planned, resulting in further deterioration in economic growth, or higher fiscal financing needs than we expect.”
The agency downgraded its outlook on SA to stable from positive a year ago, citing infrastructure constraints and rolling power cuts.