Banks in rude health despite increased risks
CREDIT growth in SA is below its long-term trend despite the uptick of credit extension to the private sector, according to South African Reserve Bank governor Lesetja Kganyago.
He was speaking at the launch of the Reserve Bank’s Financial Stability Review in Pretoria yesterday.
Credit to households is relatively subdued. Credit to corporates is slightly above its longterm trend and is driving growth in domestic credit extension.
Many have increased borrowing in foreign currencies, which raises the question of the sustainability of the debt issued. This borrowing was “going into investments”, he said.
But Mr Kganyago said most corporates were in a position in which their earnings covered debt service, although continued contraction would make this difficult going forward. The exception being mining and quarrying because of depressed commodity prices.
SA’s banks are exposed to the effects of the decline in commodity prices through their loan books and trading activities. The Bank said in its review that this raised concerns about economic performance throughout the domestic industry and in the continent, where economies are driven by commodities and South African banks have exposure.
Hendrik Nel, head of financial stability at the Reserve Bank, said South African banks were capitalised adequately to withstand credit losses.
Growth in total banking sector assets picked up in December 2015 at 15.7% year on year to R3.6-trillion, largely comprising loans and advances. SA’s financial system is challenged by increased risks and uncertainty in the global environment, the deteriorating domestic economic growth and inflation outlook. South African banks are currently trading at below their net asset value at levels comparable to the period during the global financial crisis. But Mr Kganyago passed a vote of confidence in the domestic banking sector. He said that a recent stress test showed that, “even under the most severe of macroeconomic scenarios, our banking sector passes with flying colours”. Francois Groepe, deputy governor, said the Bank intended to publish a policy paper in the near-term on macro prudential tools to measure the country’s situation. This would be accompanied by a public participation process. The Reserve Bank will use a number of indi- cators to decide when to implement the countercyclical buffer. Counter-cyclical capital buffers stipulate the minimum capital requirements in line with the Basel 3 laws and came into effect this year. The credit to gross domestic product gap is one such indicator that the Bank monitors. The Bank also indicated that there was a medium to high probability that SA’s debt would be downgraded to noninvestment status. The cut may lead to capital outflows, affect government’s rand-denominated debt, increase the cost of funding and reduce credit to the private sector. Spreads on credit-default swaps would also widen, corporate profits decline and household debt levels would increase along with financing costs, the Bank said. SA risks losing its investment-grade status with Standard & Poor’s Global Ratings due to review its BBB- assessment in June. Moody’s Investors Service put its assessment, which is one step higher, on review for a downgrade last month. Despite the risk of a cut, SA’s biggest banks have undergone common scenario stress tests and could withstand significant credit losses, according to the Bank. Other risks for the largest banks include “spillovers from excessive volatility and risk aversion in global financial markets” and continued low growth in SA, the Bank said. With Bloomberg