South Africa’s challenging economic environment is likely to stall lending growth at the country’s four biggest banks, Moody’s Investors Service said in a report published last week.
However, credit risks should remain manageable, posing only moderate downside risks to banks’ earnings.
“Sluggish economic growth in South Africa over the next 12 to 18 months will pose challenges for the country’s four largest banks,” said Nondas Nicolaides, a Moody’s Vice President — Senior Credit Officer and author of the report. “The subdued South African economy will restrain their lending growth and make it harder for borrowers, especially households, to service their debt repayments.”
The report stated that under Peer Comparison category, of Standard Bank of South Africa, FirstRand Bank, Absa Bank, Nedbank: — FirstRand Bank is Best Placed to Face Economic Challenges.
The research is an update to the markets and does not constitute Moody’s rating action.
Moody’s expects non-performing loans (NPL) ratios in the banking system to increase to around four per cent by the end of 2017 from 3.2 per cent in June 2016. In turn, this will generate higher provisioning costs that will dampen profitability with return on assets (RoA) potentially reducing towards one per cent from 1.2 per cent as of June 2016.
South Africa’s weaker economic growth, combined with rising interest rates and high inflation of above six per cent, will exert pressure on households’ disposable income and borrowers’ repayment ability, exposing banks to higher default risks.
While the four banks’ loan books are skewed towards residential mortgages, they are likely to suffer only modest credit losses because of tighter lending practices in recent years with lower loan-to-value levels and an effective legal framework in South Africa for handling the foreclosure of banks’ collateral, which contain home loan credit losses.
Corporate debt in South Africa has risen in recent quarters but it remains manageable and Moody’s expects companies to remain more resilient than households to withstand the challenging period ahead.
With the lowest level of non-performing loans (NPLs), FirstRand Bank is best-placed to manage the weak operating environment among its local peer banks. FirstRand also has the highest overall provisioning coverage for NPLs, the highest capital base and strong earnings generation.
FirstRand’s NPL ratio was 2.4 per cent at the end of June 2016, followed by Nedbank at 2.6 per cent, compared to an average 2.9 per cent for the four largest banks and 3.2 per cent for the system.