Big four banks’ earnings set to fall, Fitch predicts
Ratings agency warns of effect of downgrade
FITCH Ratings, which has a negative outlook on South Africa’s big four banks, has forecast that earnings from the financial sector will decline and loan impairment charges will increase.
The agency also predicted lower future profitability in the sector as gross domestic product growth is expected to be 2.1 percent this year, well below the long-term average for the country as well as the rates achieved in other emerging markets.
Fitch also warned that the close correlation of financial institutions posed the risk of a domino effect should the sovereign rating be downgraded by one notch.
Profit and growth
“Banks’ loans and government securities are highly concentrated in South Africa. Close correlations mean that if the sovereign rating were downgraded by one notch, so would the IDRs (issuer default ratings) of the four major banks,” Fitch said.
It cautioned that while banks were coping well with the difficult economic conditions, profitability would be stunted and growth opportunities would probably remain limited.
Fitch has a negative outlook on the long-term IDRs of FirstRand Bank, Nedbank, Absa Bank and Standard Bank of South Africa, as well as the respective holding companies of the last three banks, reflecting the negative outlook on South Africa’s rating of ‘BBB’.
Fitch said while Nedbank, Standard Bank, FirstRand’s First National Bank and Absa were wise in trying to expand on the African continent to mitigate low growth in the local economy, this was threatened by investors’ risk appetite for potential opportunities in more developed markets.
“While geographic diversification can be positive, expansion into low-rated countries… inevitably increases their risk appetite,” Fitch said.
“We believe the South African banks… are well placed to develop pan-African business and take advantage of opportunities to expand into higher margin growth markets.”
It noted that while funding and liquidity remained healthy, reliance on institutional deposits from money markets, insurance companies and pension funds exposed banks to structural funding risks.
Wholesale funding reliance can widen asset-liability maturity mismatches, result in high deposit concentrations and hinder banks’ ability to comply with Basel III’s net stable funding ratio, effective in 2018.
Liquidity
The liquidity coverage ratio is already being phased in from January, with banks required to comply with a minimum ratio of 60 percent.
Fitch noted that de-risking initiatives undertaken over the past three years were paying off and impaired loans were now manageable, representing 2 to 4 percent of total loans.
New impaired loans are emerging in unsecured consumer lending portfolios (representing 16 percent of sector lending) and in small and medium enterprises finance sectors. These sectors are particularly exposed to rising interest rates.