Treasurers’ Conference: South Africa’s rating – debt stabilisation as the key challenge

Mahin Dissanayake head up the African bank ratings group at Fitch. He weighs in on the ratings of South Africa’s five major banks and why Fitch’s outlook on the banks remains negative.

South African banks credit overview

The five largest South African banking groups are all rated the same at BB minus with a negative outlook. The negative outlook reflects our concerns about the operating environment, the weak sovereign and the economic damage caused by the pandemic. Effectively, South Africa's sovereign rating of BB minus negative acts as a cap on the banks’ ratings. So, if the sovereign is downgraded, it's very likely that the banks will also be downgraded. The reason for that is that all the South African banks’ activities are concentrated in the domestic economy and they have significant exposure to the public sector relative to their capital. Fitch believes that the South African economy will grow by about 4.3% this year compared to the 7% contraction last year. We believe that business and revenue prospects for banks will remain subdued. We think that a return to pre-pandemic performance level is unlikely for another two years. We expect a moderate pickup in lending this year, but that's mainly due to pent-up demand. In fact, lending investor Africa is likely to pick up faster. As a result, earnings will rise moderately despite the margin pressure from the low interest rate environment. We think profitability will improve this year compared to last year, but this will be mainly driven by lower credit costs as the pace of provisioning slows. We remain cautious about asset quality especially with the expiry of debt relief measures. We think that the sector impaired loan ratio will head towards 6.5% this year, compared to 5.2% last year. We believe that new impaired loans will come from both the SME and consumer segments. That's in fact inevitable given the high level of business insolvencies and the rate of unemployment. With respect to capital, we gain comfort from banks being well capitalized. They continue to show good buffers over regulatory minimums. For this we give credit to both the SARB and to banks because they have built up capital over the past few years, which provides good loss absorption capacity. We also gain comfort from banks’ solid funding and liquidity profiles despite market uncertainty. Capital, funding and liquidity are relative strengths for banks’ ratings.

Global perspective

Rating outlooks for banks globally are beginning to stabilize. One in five rating actions in Q1 of this year led to rating outlooks being revised to stable from negative. These were spread across all regions excluding Latin America. We even saw some ratings stabilizing in Africa, mainly in Nigeria. The global stabilization trend signals that near-term risks have eased as economic recovery gathers pace combined with the successful rollout of vaccines in some countries. The key risk to sovereign ratings and bank ratings globally is a resurgence in the virus as new variants surface and there's a return to more stringent lockdowns. This risk is more difficult to capture in our ratings or in our outlooks.