S&P sees high house­hold debt as a risk for SA banks

The Star Early Edition - - BUSINESS REPORT - Ka­belo Khumalo

RAT­ING agency S&P Global yes­ter­day flagged the high in­debt­ed­ness of South African house­holds as pos­ing a ma­jor risk to the coun­try’s bank­ing sec­tor.

In its Bank­ing In­dus­try Coun­try Risk As­sess­ment (Bi­cra) for South Africa, S&P said it es­ti­mated the coun­try’s per capita gross do­mes­tic prod­uct at about $6 000 (R78 000) for this year, which in US dol­lar terms was still lower than in 2010.

The Na­tional Credit Reg­u­la­tor (NCR) said about 10 mil­lion South Africans were over-in­debted, which meant they were un­able to meet their fi­nan­cial obli­ga­tions timeously.

Matthew Pirnie, an an­a­lyst at S&P, said the rat­ing agency ex­pected very mod­est growth in re­tail lend­ing over the next 18 months as the low eco­nomic growth, ris­ing un­em­ploy­ment, and po­lit­i­cal un­cer­tain­ties con­tin­ued to con­fine con­sumer con­fi­dence.

“We con­tinue to be­lieve that do­mes­tic house­holds pose the most sig­nif­i­cant source of risk for the banks be­cause of their rel­a­tively high lever­age and low wealth lev­els com­pared with other emerg­ing mar­kets,” Pirnie said.

In tes­ti­mony be­fore South Africa’s leg­is­la­tors last year, Nomsa Mot­she­gare, NCR chief ex­ec­u­tive, said as at the end of Septem­ber 2015 the coun­try’s gross debtors’ book stood at a whop­ping R1.6 tril­lion, while the to­tal credit rand value of new credit granted to con­sumers was close to R124bn.

Macro-eco­nomic sta­tis­tics web­site Trad­ing Eco­nom­ics said house­hold debt-to-in­come in South Africa av­er­aged 57.28per­cent from 1969 un­til last year, reach­ing an all-time high of 86.4per­cent in 2008 and a record low of 40.3per­cent in 1980.

Other weak­nesses S&P flagged about the coun­try’s bank­ing sec­tor in­cluded mul­ti­ple de­vel­op­ment needs, sup­ply and skill short­ages, in­clud­ing in­fra­struc­ture bot­tle­necks, as well as labour mar­ket rigidi­ties that con­strained eco­nomic growth po­ten­tial.

The rat­ing agency also said the fi­nanc­ing of the coun­try’s cur­rent ac­count deficit hinged on po­ten­tially volatile port­fo­lio flows, while the sec­tor re­lies on con­cen­trated short- to medium-term fund­ing from in­sti­tu­tional in­vestors, but the risk was mit­i­gated by the closed rand sys­tem.

S&P found that in the year to March, credit im­pair­ments im­proved to 1.2per­cent of to­tal loans from 1.4per­cent, at the same time the sec­tor’s to­tal cap­i­tal ad­e­quacy in­creased to 16.05per­cent from 13.88per­cent and re­turn on equity im­proved to 17.33per­cent from 16.31per­cent.

Pirnie said a pos­i­tive for the sec­tor was that South African house­holds and cor­po­rates had some­what pre­pared for long-term eco­nomic and po­lit­i­cal in­sta­bil­ity by min­imis­ing lever­age over the past few years.

“We see the trend for bank­ing in­dus­try risk as sta­ble be­cause we con­sider the sig­nif­i­cant de­te­ri­o­ra­tion of South African banks’ prof­itabil­ity or fund­ing pro­files as un­likely. If the banks become more re­liant on more volatile fund­ing or change to a net debtor po­si­tion, we could lower our as­sess­ment,” he said.


Ear­lier in the year, S&P said its out­look for the big South African banks re­mained neg­a­tive but that pres­sure was eas­ing. How­ever, it said the rest of Africa op­er­a­tions would rep­re­sent a drain on some of the coun­try’s banks’ prof­itabil­ity over the next 12 months.

Among the pos­i­tives noted in the Bi­cra was that the coun­try’s regulation was in line with in­ter­na­tional best prac­tices, while it had top-tier bank­ing sta­bil­ity and good risk man­age­ment.

Ernst & Young’s anal­y­sis of the ma­jor South African banks ear­lier this year found the banks had pro­duced cred­i­ble re­sults against eco­nomic head­winds, with the four ma­jor bank­ing groups hav­ing posted com­bined prof­its of R72.3bn in the year to December, up 8.4per­cent on an an­nu­alised ba­sis from 2015.

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