Despite low economic growth in South Africa, S&P Global Ratings said in a report released on Tuesday that it expects SA banks to maintain robust profitability and sound capitalisation in 2018.
S&P believes domestic households pose the greatest source of risk for SA banks, because of their relatively high leverage and low wealth levels compared to those of other emerging markets.
However, S&P noted that it has seen an improvement in SA’s households in terms of leverage and affordability.
“We see possible deterioration in the quality of the corporate loan books, due to the rising leverage for the past five to ten years – averaging around 10% per year – and weaker profitability,” the report states.
“Furthermore, while major banks have focused on cost management over the past few years, we do not factor in any additional efficiency gains going forward. We expect credit losses for the top-tier banks to range between 0.7% and 1% in 2018 and somewhat higher among the lower-tier banks, especially the unsecured consumer lenders.”
Although SA has had low economic growth, S&P noted renewed investor and corporate and household confidence. Therefore, it projects a gross domestic product (GDP) growth of 1% in 2018 and 1.7% in 2019. It regards these rates as still weak for an economy like that of SA. S&P believes the growth cycle is currently at the bottom, but that the speed at which growth returns will depend on policy shifts and the building of confidence.
S&P pointed out that SA is hoping its new President Cyril Ramaphosa will deliver on his promises to fight corruption and improve business and household confidence.
“The market has reacted favourably to this succession, with the rand climbing and sovereign spreads falling. This early investor sentiment largely rests on the view that Ramaphosa will reduce the corruption and executive mismanagement that has been the root cause of the country’s dramatically weak growth,” states the report.
Source:Fin24, by Carin Smith