Moody`s upgrades outlook for SA banks to stable

Source: Fin 24, 11/09/2018

Moody’s has changed its outlook for SA’s banking system from negative
to stable, the ratings agency said in a report issued on Tuesday.
Moody’s rates seven commercial banks in SA, which accounted for 9% of
banking assets as at December 2017. The rating for banks is currently
below investment grade at Baa3 with a stable outlook.
In its report, Moody’s said that the bank’s creditworthiness will
remain resilient over the next 12 to 18 months, but banks will face
weakening operating conditions.
“Slow economic growth will hold back the banks` new business and
revenues,” the report read.
Economic growth is expected to remain weak given poor consumer
spending, volatility in emerging market currencies as well as
inflationary pressures. Moody’s recently cut the growth forecast for
2018 from 1.5% to between 0.7%.
Moody’s is of the view that bank’s credit risk profile and problem
loans to remain stable until the end of 2019. SA banks’ capital is
also expected to remain strong for the period. Further, funding and
liquidity conditions will be stable.
The challenging operating environment will suppress business
opportunities and loan demand, exerting pressure on banks’ loan
quality. Loan growth slowed to 2.1% in May 2018, compared to 2.5% in
May 2017, according to Moody’s.
“We expect growth to remain subdued in 2018/19 because of weak demand,
particularly as growth in mortgage loans has slowed. We also believe
that banks have further tightened their lending criteria in response
to the weak economy, which will further dampen loan growth by making
it harder for borrowers to take on new credit,” Moody’s explained.
The lower loan growth is likely to impact net interest income.
Increased costs for staff and digitalisation will also drag down net
profitability, the report read.
Overall, earnings will be strained by slower revenue growth and higher
operating expenses.
Although profitability has remained resilient, the low economic
growth, rising competition from larger banks and fintechs could curb
pricing power, and drive down revenue growth.
Moody’s expects return on assets and return on equity to come under
pressure in 2018/19.