Johannesburg - South Africa’s banking and insurance companies were among the biggest losers on the FTSE/JSE Africa All Share index Tuesday after Moody’s Investors Service predicted that bank earnings would be lower in the year ahead after the central bank increased interest rates.
“Borrowers’ reduced debt affordability will have a knock-on effect on banks’ asset quality, reversing the improving trend of non-performing loans during the past few years,” the ratings company said Monday in an e-mailed statement. “We expect the effects to show in lower earnings growth and weaker profit metrics.”
FirstRand, Africa’s biggest bank by value, and insurer Sanlam were among the 10 worst-performing stocks on the benchmark all share index. The FTSE/JSE Africa Banks Index dropped 5.1 percent, the most since December 11. The FTSE/JSE Africa Financial 15 Index fell 3.9 percent with only two of 16 members gaining.
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“With rising interest rates, you’d expect some consumer pressure and rising credit losses or bad debts in terms of the banks -- that’s kind of expected,” Neelash Hansjee, banks analyst at Old Mutual’s investment unit, said by phone from Cape Town. “2016 is going to be a tough year, the macros are going to be quite challenging. We expect some pressure on revenue in a low-growth environment.”
The South African Reserve Bank increased its benchmark interest rate by 50 basis points to 6.75 percent on January 28. Lenders must also contend with a slowing economy, higher funding costs, reduced demand for debt and global Basel III requirements that force them to hold more capital.
“The one controllable lever is cost management and it will be interesting to see how this is managed,” Hansjee said. “The outlook is very challenging at this point.”
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