Moody's has changed its outlook on the South African banking system to stable from negative, reflecting the expected resilience of the banks' financial metrics and creditworthiness over the next 12-18 months, despite weakening operating conditions, Moody's Investors Service said in a report today.
Moody's report, "Banking System Outlook - South Africa, Resilient financials amid a weakening economy drive our stable outlook" is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. This report does not constitute a rating action.
"Although slow economic growth will hold back South African banks' new business and revenues, we expect their credit risk profiles and problem loans to remain broadly stable through to the end of 2019," said Nondas Nicolaides, a Moody's Vice President -- Senior Credit Officer. "Funding and liquidity conditions will be stable, while the banks' capital metrics will remain solid. Profitability will be strained by slow business growth and higher costs."
South Africa's subdued GDP growth will persist this year and next, with weak investment and consumer confidence limiting household spending and private investment. Recent global dynamics in emerging markets will likely continue to pressure the local currency and further damage investor and business confidence.
Moody's forecasts real GDP growth at around 0.7%-1% this year and 1.5% in 2019, up from 1.3% last year.
The challenging operating environment will suppress business opportunities and loan demand and exert pressure on banks' loan quality. Moody's also believes that banks have further tightened their lending criteria in response to the weak economy, which will further dampen loan growth.
Over the next 12-18 months, Moody's expects the performance of bank loans to be challenged by South Africa's weak economy, which will strain borrower cash flows and make it more difficult for borrowers to manage loan repayments.
However, Moody's believes South African banks will proactively manage their loan quality and will contain any risks stemming from the slow pace of growth.
South African banks maintain comfortable capital buffers that provide room for loan growth and protection for creditors under Moody's base-case scenario. The rating agency expects capital buffers to remain robust, helped by slower growth in risk-weighted assets in 2018-19.
Liquidity should remain adequate over Moody's outlook period because banks have built up liquidity buffers in the last few years.
