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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.


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