In a report on the outlook for South African banks, S&P global ratings indicated that weak growth and lower affordability of households pose risks for the banking sector.
But despite the poor growth, projected at 1.4% for 2017, credit losses should be between 0.8% and 1% for top tier banks.
The low economic growth projections are subject to global growth as well as South Africa’s trade, stated the report. South Africa’s economy is still commodity-driven which relies on demand from China.
There are also “long-term domestic challenges” which are dragging down growth. Even though government has identified reforms it will take time to address the skills shortages and infrastructure bottlenecks, according to S&P.
“Without signs of real improvement or at least policy certainty and continuity, private sector investment is likely to remain low. Household spending will likely remain restrained,” stated the report. Credit growth is expected to be flat in 2017.
Household debt levels to income have been decreasing gradually, from 85% in 2008 to 77.6% recorded in 2015. There is cause for concern in that this is a shift from secured residential mortgages to more unsecured lending and instalment credit.
This reflects two trends: The first being that the wealthy are reducing their debt faster than middle and lower income markets and secondly, tightening credit policies are restricting access to long-term secured credit. This shows that household affordability has weakened, according to S&P.
“Over the past few years, modest interest rates and inflation have been dually responsible for weaker household affordability.” S&P expects interest rate rises of 25 to 75 basis points over the next 12 to 18 months and inflation of 6% to 7%.
“This will continue to pressurize household affordability but not materially weaken asset quality.” Domestic households pose the “most significant” risk for banks because of their relatively high debt and wider income differences.
Corporate credit growth may be subdued this year as infrastructure development and real estate deals are “less attractive.” Further, Ebitda (earnings before interest, tax, depreciation and ammortisation) margins of corporates are coming down.
By also including the mining sector in the corporate book, this would materially drag down the performance of the entire sector, said the report. South African banks are not overly exposed to mining, as it accounts for less than 3% of total loans, said the report.
The banks also have little foreign currency lending across the corporate book, this protects the quality of the loans against the weak rand.“We therefore expect the corporate loan book will continue to outperform loans to households in 2017.”