Barclays slid 1.95 percent to R135.80 followed by Nedbank which fell 1.35 percent to R225.80 while Standard Bank eased 1.64 percent to R136.47 and FirstRand 0.82 percent to R44.90. The downward spiral, which has seen banking shares falling between 7.67 and 13.37 percent in the past week alone, has risen fears that the SA Reserve Bank (Sarb) could review its monetary stance in the next Monetary Policy Committee meeting next month.
An economist who spoke to Business Report on condition of anonymity said the bank would be watching the market very closely to determine its view. “The Reserve Bank will be interested in whether the rand falls beyond expectations and there is general panic in the market which could see investors taking their money out of the country,” the economist said.
The Reserve Bank last month kept its repo interest rate unchanged at 7 percent.
But Nicholas Ngepah, of the University of Johannesburg, said that the Sarb was unlikely to respond to the decision itself, but to its consequences. He said such a response was unlikely to be immediate.
He said the Sarb would be concerned about the inflationary pressures resulting from the decision. For instance, he said, the decision had led to the weakening of the rand and may push up South African borrowing costs and debt servicing. As a result of the weaker rand, imports would be more expensive. “We will import more inflation because most of our commodities such as oil and most capital goods are imported, in the likely event that the impacts on inflation and debt servicing is severe, it will most likely touch all the socio-economic fabrics of South Africa, including the poorest people” said Ngepah.
The Reserve Bank said South African banks were adequately capitalised to deal with the effects of a cut to a sub-investment grade. It said the banks were last year subjected to a common scenario stress test, including a macroeconomic scenario that entailed excessive financial market volatility and risk aversion.
Read also: S&P downgrades SA banks
“The results of the stress test showed South African banks to be adequately capitalised to withstand significantly adverse scenarios. The resilience of the banks stems from the high capital buffers that prevail in the South African banking system,” the Reserve Bank said.
It said the South African financial system remained healthy, robust and resilient.
Barclays Africa said it was also well-capitalised with a strong liquidity position and a balance sheet of more than R1trillion. The company said it had a diversified portfolio of businesses with geographical presence across Africa.
S&P’s said the rating actions on the banks followed its decision to downgrade South Africa’s foreign and local currency sovereign credit ratings. The ratings agency cited political and institutional uncertainty for the move.
But S&P’s said,despite the slow economic growth and political turbulence, South African banks had been resilient, and pointed to the slight improvement in the banking sector’s average return on assets from 1.1 percent in 2015 to last year’s 1.3 percent.
The rand traded at R13.7675 to the dollar, 0.31 percent stronger from its New York close on Wednesday. But Standard Bank expected the rand to weaken further in the near term on political risk and uncertainty, despite global conditions favouring EM currencies.
“Moves within the R14 to R14.50 ranges would not surprise us, but in our view it will have to coincide with more negative sentiment towards EM in general (over and above current local developments) for this type of weakness to become more sustainable,” Standard Bank strategist Walter de Wet said.
Nedbank particularly laid the blame squarely on President Jacob Zuma’s surprise cabinet appointments, charging that the changes had done South Africa great harm. It said S&P’s believed that the executive changes had put fiscal and growth outcomes at risk and that contingent liabilities to the state were rising.
But the bank also said that the South African banking system was sound and well-capitalised. Nedbank said it was well prepared to deal with the volatility and pressure that a downgrade to sub-investment grade brought. “The bank has strong capital and liquidity levels and balance sheet strength to work our way through the difficult environment,” it said.
S&P’s downgrade had weakened the rand, “a barometer of confidence,” and would place upward pressure on both inflation and interest rates.
It said it anticipated that credit losses of major banks would be between 0.8 percent and 1 percent this year. But decreasing investor confidence damaged the local currency, stoking inflation and interest rates. “Accordingly, this could erode the top-tier banks’ profitability, resulting in lower returns on equity in 2017 than the currently anticipated 15 percent to 19 percent,” said S&P’s.