SA banks face pressure for year or more

Moody’s Investors Service last week changed its outlook on the SA banking system from negative to stable, citing the resilience of financial metrics and creditworthiness over the next 12 to 18 months despite weakening operating conditions.

Moody’s examined seven commercial banks in SA presently below investment grade. Its rating upgrade follows the release of bleak macroeconomic data that leaves the 2019 economic outlook in the balance.

Its report, Banking System Outlook – South Africa, highlighted stability in business and revenues despite the economy’s slow economic growth.

Technically, SA is in a recession. Second quarter of 2018 GDP figures show the agricultural sector dipped by 29.2% annualised (QQSAA), while the manufacturing, trade and government sectors contracted -0.3%, -1.9% and -0.5% respectively. The financial sector, however, grew 1.9%, contributing 0.4% to the overall figure.

Contraction of other sectors can still spill over into the banking space.

At the lower end of the market, July’s retail sales growth disappointed, with year-on-year figures weakening to 1.3% in July (June: 1.8%). With a contraction in retail sales, banks are bound to feel the pressure.

“Household debt is still at high levels ... and this can be seen in increasing levels of nonperforming loans in the half-year results released by banks,” says Absa’s Tsitsi Hatendi-Matika.

“Banks will remain under pressure until the consumer gets significant relief.”

Moody’s Nondas Nicolaides acknowledges the risk: “We believe the retail sector is more vulnerable to the current slowing economic conditions and that banks with higher exposure to households and especially unsecured retail loans are likely to sustain higher losses.”

August’s Purchasing Managers’ Index (PMI) collapsed 8.1 points to 43.4, the lowest reading in over a year, indicating the likelihood of a contraction in manufacturing production.

With mixed PMI figures, manufacturing activity will be affected along with credit to the manufacturing sector, which will affect banks’ revenues.

“Corporates are sitting on the sidelines given the policy uncertainty on the mining charter and land reform,” says Nicolaides. “We expect banks’ profitability to come under pressure over the next 12 to 18 months.”

Private sector credit extension growth has averaged 5.4% yearon-year so far this year, barely keeping up with inflation. Company credit extension slowed to 5.9% year-on-year in July.