Banks still on firm footing
January 28, 2008
Johannesburg - Strong growth and the absence of exposure to subprime mortgages should continue to support robust profitability and asset quality in the South African banking market through 2008 and into 2009, says Standard & Poor's.
The ratings agency says in a new report South African Banks Balance Robust Growth With Rising Risks In 2008 that banks also face growing macroeconomic and political risks from rising inflation in an overheating economy and from the uncertainty over the presidential succession in 2009, the report says.
Balancing these opposing forces over the coming months will be the central challenge for the four domestic banks that together hold more than 80 percent of South Africa's banking assets.
"GDP growth rates of 5 percent-6 percent in South Africa over the past five years, as well as deregulation in the banking sector, have contributed to strong earnings growth for the banks," said Standard & Poor's credit analyst Jerome Chui.
Growth in 2008 is likely to slow somewhat, as inflation is still well above the upper end of the South Africa Reserve Bank's 3 percent-6 percent target range and interest rates are high at 11 percent and could increase further in the first quarter of 2008, the report says.
"With significant infrastructure projects coming on stream, partly in preparation for the 2010 soccer World Cup, we still expect 2008 to be a positive year for bank revenues," said Chui.
This is irrespective of the slowdown in the consumer and retail market and the predicted rise in personal defaults and insolvencies, albeit from historically low levels at which nonperforming loans (NPLs) are currently about 1.4 percent of gross loans.
On this basis, even an additional 1 percent increase in NPLs wouldn't prove detrimental to the banking sector's performance.
"With the political outlook becoming more opaque and the economic environment developing greater uncertainties, the risks of a downturn to the banking sector have also increased," said Chui.
"However, these risks are still fairly balanced. Although it is more likely that any future South African president will tolerate a looser fiscal policy than in previous years, the current economic environment would limit the banks' room to manoeuvre."
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