May 5, 2017 / 3:22 PM / 6 months ago

Fitch: South African Banks Pressured by Stagnant Economy

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: South African Banks - Results Dashboard here LONDON/PARIS, May 05 (Fitch) The stagnant South African economy is beginning to exert pressure on banks' results, Fitch Ratings says. The "big five" South African banks began to feel the effects of a stagnating economy in 2016. Profitability remained sound, but operating profit may have peaked as credit growth has slowed significantly. In our view, financial metrics need to continue improving to mitigate an increasingly challenging operating environment. South African banks suffered in 2016 from a further reduction in credit growth to 3% (from 9% in 2015). Nevertheless, profitability metrics held up well, benefitting from some small balance-sheet expansion, solid margins, diversified non-interest income and good cost control. The "big five" banks continued to benefit from a favourable banking market structure, in which they dominate. Despite the problems in the economy, the impaired loans ratio for the big banks was stable for a third consecutive year in 2016 at 3.3%. Impaired loans continue to be driven by retail and business banking, particularly unsecured retail products. In Fitch's view, sound risk-management practices have delayed a worsening in asset-quality metrics. Banks continued to build liquidity in 2016 to meet Basel III requirements. At end-2016, all banking groups except Barclays Africa Group Limited had met the 1 January 2019 Basel III requirements for a 100% liquidity coverage ratio (LCR). They benefitted from a changing deposit mix in favour of more stable retail deposits, which are treated more favourably under the LCR and net stable funding ratio (NSFR) regimes. Capital ratios across the five banks ticked up by 42bp in 2016 on Fitch's internal measure (Fitch Core Capital) and also rose at a similar level on regulatory measures. Internal capital generation reduced (as net income growth was below growth in dividend distributions) but capital ratios were supported by limited growth in risk assets. Fitch believes that banks need to build larger capital buffers given the weakening operating environment, as indicated by the recent downgrade of the sovereign Long-Term Issuer Default Rating to 'BB+'. Looking ahead, Fitch sees continued pressure in the South African operating environment in 2017. We expect asset-quality metrics to deteriorate and to begin to affect profitability metrics. Capital ratios may begin to erode if shareholder pay-out ratios are not reduced. Banks have limited reliance on foreign funding. Nevertheless, funding costs are likely to rise given weakening market sentiment as well as the possibility of interest-rate rises as the government looks to bolster a weakening rand. More information is available in "South African Banks - Results Dashboard", available at or by clicking the link above. 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