Moody’s lifts outlook on local banks to stable

RATING agency Moody’s Investors Service yesterday upgraded its outlook of the South African banking sector to stable from negative, saying the sector’s higher earnings and capital levels would provide a buffer against macro-economic factors and looming increases in nonperforming loans.

SA and China are the only countries in the Brazil, Russia, India, China and SA (Brics) bloc whose banking systems have a stable rating from the agency.

But local banks’ nonperforming loans, or loans past their due dates where the borrower is not making any payments, are set to rise as the Reserve Bank continues raising interest rates. An anaemic economy, projected to grow just 1.5% this year, is also hurting consumers.

“The persistent economic slowdown, lower consumer spending and investment, and rising interest rates will impair banks’ asset quality,” Moody’s said. “High household indebtedness and mounting debt servicing costs — as interest rates rise — will make it harder for borrowers to repay their loans.”

Household debt hit 75.2% of disposable income by the end of last year. Net household savings were a negative R50bn.

Banks’ overdue loans had dropped nearly 22% over the past five years to R105bn, benefiting from record-low interest rates, according to Moody’s data. But the trend was reversed this year as these loans returned to R135bn following the Reserve Bank’s hikes of the repo rate.

The ratings agency expects past-due loans to increase in tandem with interest rates, and predicts they will comprise 3.5% to 4% of the banking gross loan book in the 2015-16 year.

“Banks’ resilient core earnings and ample capital buffers will enable them to manage the expected asset quality deterioration,” Moody’s said.

Professional services firm EY said earlier the big four banks’ earnings for the first half were the highest since the 2008 global financial crisis.

Combined corporate and investment bank earnings rose 23.4% to R12.1bn, while retail and business bank earnings climbed 11.5% to R15.8bn. With households struggling, banks shifted their exposure to focus more on companies.

Debt comprised half the equity on the average corporate balance sheet, and earnings could cover interest expenses about four times, Moody’s said.