Downgrade will force banks to charge their clients more
SOUTH African banks would pass on the higher costs of funding to the consumer as they move to re-price higher their Risk Weighted Assets to offset their downgrades by international ratings agencies.
The banks were downgraded just days after Standard & Poor’s and Fitch cut the country’s credit rating to junk following a cabinet reshuffle that saw Malusi Gigaba replacing Pravin Gordhan at the helm of the National Treasury.
Fund manager at Ashburton Investments, Nkareng Mpobane, said capital and funding would drive the long-term views around the sector.
”Funding is an important aspect of the longer term assessment of the sector. Banks have consistently, in the past, been building up their sources of stable funding and liquidity with minimal adverse impact to margins. We would expect that the sector should be able to pass on the higher costs of funding to the consumer, within reason,” Mpobane said.
Earlier this month Absa Bank, FirstRand Bank, Investec Bank, Nedbank and Standard Bank were downgraded from BBB- to BB+ by Standard and Poor’s and Fitch.
The rating agencies said the country’s sovereign credit downgrade would result in the deterioration of banks’ financial metrics, in particular, asset quality, funding and liquidity, which would have knock-on effects on profitability and capital.
Risks
Mbopane said the short-term risks facing the sector lied in the re-adjustment of share price valuations.
She said the medium term risks on the sector’s profitability in the wake of the downgrades was higher inflation and flat interest rates.
“For banks, we would closely monitor the top-line growth drivers of Net Interest Income (as advances appetite wanes on the supply side) and Non-Interest Revenues (as deal-making fees and commissions taper off). Impairments would also likely worsen the deeper we move into sub-investment grade, depending on inflation outputs and the South African Reserve Bank response.”
She added that the recent price pressure meant that dividend yields in the sector now ranged between 5.5 percent to 7.5 percent.
Obsidian Capital said dividends paid to investors in the banking sector contracted 25 percent during 2008/09 financial crisis. It said the sector was hugely important to the country’s fiscus as it contributed close to half of all company tax revenues.
Earlier this month the South African Revenue Service said that personal income tax (PIT), corporate income tax (CIT), VAT along with Customs and Excise (C&E) in aggregate remained the largest sources of tax revenue and represented about 94.5 percent of total tax collections.
The largest contributor was PIT, which accounted for 37.2 percent of total revenue, followed by net VAT contributing 25.2 percent and CIT collections were 18.1 percent. C&E collections contributed 27 percent to collections. The financial services sector remained the largest CIT contributor to total net revenue at 49.7 percent, which reflected a yearon-year growth of 7.4 percent.