Tuesday 12, September 2017 by Matthew Amlôt

Moody's maintains negative outlook on South Africa's banking system

Moody's Investors Service has maintained its negative outlook on South Africa's banking system, reflecting the rating agency's view that banks' creditworthiness will come under some pressure over the next 12 to 18 months.

Moody's Investors Service has maintained its negative outlook on South Africa's banking system, reflecting the rating agency's view that banks' creditworthiness will come under some pressure over the next 12 to 18 months.

"Our negative outlook for South Africa's banking system is mainly due to the weak operating conditions, which will challenge banks' loan quality and profitability," said Nondas Nicolaides, a Moody's Vice President -- Senior Credit Officer and co-author of the report. "Low economic growth will weaken banks' loan quality and profitability."

Moody's forecasts real gross domestic product (GDP) growth in South Africa of only 0.5 per cent this year, rising to 1.2 per cent in 2018, still significantly lower than the government's 5.4 per cent target as per its National Development Plan 2030.

With an unpredictable domestic political context and still unfavourable commodity prices, Moody's expects reduced investor and consumer confidence to lead to sluggish economic growth, which will weaken banks' revenues and loan quality.

The challenging operating environment -- characterised by weak consumer and investor confidence and rising unemployment - will suppress business opportunities and loan demand, and exert pressure on banks' loan quality.

Over the next 12 to 18 months, Moody's expects South Africa's weak economy to pose a challenge to the performance of bank loans. Although impaired loans are at historical low levels at only 2.9 per cent of total loans as of May 2017, the impaired ratio is forecast to trend upwards during 2017-18 towards 3.5 per cent because impaired loans will rise at a faster pace than gross loans.

However, South African banks maintain relatively satisfactory capital buffers that provide room for loan growth and protection to creditors in our base case scenario. South African banks' have also increased their exposure to corporates compared to households, which has benefited their asset risk.

Loan growth is expected to remain low in 2017-18 because of weak demand, particularly as growth in mortgage advances has slowed in the first quarter of 2017. This follows a slowing of loan growth to just 2.3 per cent as of May 2017 from 11.1 per cent in May 2016, the lowest growth rate in more than five years.

Banks' profitability will weaken marginally over the outlook period, reflecting restrained business growth, contracting margins and increased provisioning requirements. Moody's expects subdued GDP growth and rising competition to curb banks' pricing power this year, particularly in the corporate segment, driving down revenue growth.

Banking system outlooks represent Moody's forward-looking assessment of fundamental credit conditions that will affect the creditworthiness of banks in a given system over the next 12 to 18 months.

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