SA banks wilt in investors’ reshuffle backlash
South Africa’s banks index fell to the lowest in six months after S&P Global Ratings cut the sovereign foreign currency debt rating to junk.
The six-member index has plummeted more than 9% since President Jacob Zuma fired Pravin Gordhan as finance minister.
Barclays Africa, still waiting for its London-based parent company to sell down its holdings, has been hit the hardest, sliding 16% in 2017.
The S&P downgrade “is bad for banks’ net return on assets and return on equity, not just via lower performance on existing assets, but also via a higher incidence of non-performing loans,” Adrian Saville, chief strategist at Citadel Wealth Management, said yesterday.
Moody’s Investors Service said on Monday its ratings were on review.
Short-term volatility in bank stocks is expected, Mike Brown, chief executive officer of Nedbank Group, said by e-mail. “Our cost of capital and certain borrowing costs, mainly in debt-capital markets, will increase, meaning we will charge more for our loans. As consumer finances come under more pressure, affordability will naturally decline, even if lending criteria stay the same.”
While the banks’ debt will have to be downgraded alongside the sovereign cut, that’s unlikely to lead to a banking crisis because banks are well-capitalised, said Peter Attard Montalto, a London-based economist at Nomura International.
Still, even with the downgrade and the threat of more to come, banks’ average return on equity remained above 16% last year, according to EY research, and may continue to beat the ratios of their peers in Europe and the US.
“We have 50% more capital than in the global financial crisis and all South African banks came through that event fine,” Nedbank’s Brown said. “Banks are well prepared for this event and have conducted numerous stress tests – I’m confident all will remain stable in the months ahead.”