Expectations of creditworthiness knock banks

ON Friday, ratings agency Moody’s lowered its outlook for the South African banking system from stable to negative, citing deteriorating operating conditions over the next 18 months. As a result, shares fell across the sector.

Africa’s most advanced economy is expected to grow less than 1% this year, hobbled by low commodity prices, drought and political ructions that have unnerved investors.

Following the announcement, Barclays Africa dropped 2.2%, Standard Bank shed 1.08% and Investec was 0.5% lower.

But by the JSE’s close on Friday, most banking shares had recovered somewhat, with the exception of Barclays Africa, which closed down 2.71% to R146.31.

The ratings agency said its annual banking system outlook “expresses Moody’s expectation of how bank creditworthiness will evolve in this system over the next 12 to 18 months. The challenging economic outlook will strain borrowers’ repayment capacity, fuelling increased asset risks.”

Earlier this month, Moody’s kept South Africa’s sovereign rating on hold at Baa2 with a negative outlook — two notches above junk.

The ratings agency said it expected the banking system’s nonperforming loan ratio to rise to around 4% by the end of next year from 3.1% in December last year. It ascribed this to pressure on corporates and consumers from rising interest rates and inflation.

It also said profitability in the sector could come under strain due to waning demand for credit and lower business opportunities.

Fellow ratings agency Fitch, which has South Africa at one notch above speculative grade, said on Thursday that the country’s authorities should avoid populist measures — such as introducing a minimum wage — in the run-up to local government elections in August.

S&P Global Ratings, which will announce its ratings decision on the country on Friday, has South Africa’s debt at BBB-, one notch above speculative grade and with a negative outlook.

Graeme Korner, director at fund manager Korner Perspective, which invests in banks, said: “We have expected the lower outlook for a while.

“We think the earnings of the banks will be OK in spite of these concerns, because the fact is, South African banks are very good value and pay good dividends.” —

The fact is, South African banks are very good value and pay good dividends