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Moody’s Investors Service on Friday cut the outlook for South Africa’s banking system from stable to negative, just weeks after the agency affirmed its rating for the country.
This blow to a key sector of the economy comes a week before Standard & Poor’s (S&P) is set to release its latest assessment.
Moody’s said the change in its assessment reflected its view that the major local banks’ creditworthiness was likely to come under pressure in the next 12 to 18 months.
“Our negative outlook for the banking system is consistent with the current negative outlook on the government rating and on the large banks’ ratings,” Moody’s said.
“The change in outlook is mainly due to the deteriorating operating conditions, which will challenge banks’ asset quality and profitability,” the agency said.
Another factor that drove the change in outlook was the expectation that the government’s capacity to support any of the banks was likely to deteriorate in the future.
A further driver of the downgrade in the outlook comes due to the agency expecting the bank’s profitability to deteriorate because of rising loan losses and because interest margins are forecast to come under modest pressure.
Moody’s change in outlook for the local banks will take some shine off the optimism that flowed earlier this month from the agency’s decision to affirm its rating for the country at two notches above “junk” status with a “negative” outlook.
“The depreciation of the rand will continue to drive up the cost of imported consumer goods and industrial inputs, and as drought conditions reduce agricultural output, all of which will weaken demand for bank loans,” Moody’s said.
“We forecast real gross domestic product growth will be only 0.5% this year, which is well below the country’s economic potential and down from 1.3% in 2015, before recovering to a still modest 1.5% in 2017,” Moody’s said.
The challenging economic outlook would strain borrowers’ repayment capacity, fuelling increased asset risks, while at the same time the banking system’s nonperforming loans ratio would rise to about 4% by the end of next year from 3.1% in December.
Moody’s expects that South African banks will struggle to meet the key liquidity requirements required by the Basel international standards.
“We expect funding costs will increase marginally due to the country’s rising interest rates and intensified competition for deposits,” Moody’s said.
Amid a slow economy, the agency said it expected that bank earnings would come under pressure because of lower business opportunities.
The banks’ return on assets will be about 1% this year and next year, down from 1.2% reported in December.
Moody’s rates South Africa’s largest eight commercial banks on average at Baa2, which is two notches above junk status.
Standard Bank, FirstRand, Absa, Nedbank and Investec have a local and foreign currency bank deposit rating of Baa2 with a negative outlook.
The JSE’s Banks Index was down 0.8% by 4pm on Friday, with Barclays Africa down the most of the major banks, losing 2.15%
