Moody’s has changed its outlook for the South African banking system to stable from negative.
The uplift reflects the ratings agency’s assessment that the financial metrics and credit worthiness of commercial banks will remain resilient over the next 12 to 18 months in spite of weakening operating conditions.
“Our stable outlook for the banking system is consistent with the current stable outlook on the government credit rating and on the ratings of the country’s largest banks,” it said in a statement.
Moody’s rates seven commercial banks, which accounted for 91% of the banking sector’s assets as at December 2017.
It expects weak consumer spending, volatility in emerging market currencies and inflationary pressures to weigh on economic growth. It sees GDP growth of between 0.7% to 1% in 2018, down from the 1.3% registered in 2017, and 2019 growth forecast stands at 1.5%.
Despite the weakening trading environment, it expects the credit risk profile and problem loans of banks to remain “broadly stable” through to the end of 2019.
Currently South African banks report capital metrics above minimum regulatory requirements and Moody’s expects capital buffers to remain resilient and protected by profits. It flagged a potential decrease in institutional short-term deposits, which are source of funding for banks, as a challenge in meeting Basel III’s net stable funding ratios but said their funding profiles are supported by good liquidity buffers and the limited use of foreign-currency funding.
It expects the profitability of banks to be hampered by slow business growth and increased operating expenses and sees a decrease in the 1.4% return on assets reported in June.
Moody’s said its ratings do not currently incorporate an uplift based on government support. “A formal bank resolution framework will be in place within the next 12 months, introducing bail-in for certain creditors in a bank insolvency. Once the resolution regime is operational, we will consider applying our advanced loss given failure analysis to all rated South African banks, which could benefit their deposit and senior debt ratings.”
The change in outlook does not constitute a ratings action.