Fall in banks' earnings could impact SA's social spend
Richard Hasson, a fund manager at Electus Fund Managers, said the downgrades had contributed to the negative outlook of SA's banking company earnings. Hasson said banking shares started the year on a strong footing as valuations were cheap and the economic outlook was improving until mid-March, with notably a stronger currency and an expectation that interest rates could move lower by year-end.
“But changes to the cabinet, especially the removal of the respected former finance minister, and the ratings downgrades since then, resulted in higher bond rates, a weaker currency with an interest rate cut potential being put on hold, lower business and consumer confidence, with a weaker gross domestic product growth outlook,” Hasson said.
“These are all negative for the outlook for banking company earnings and bank share valuations, which is why the banking shares have declined since late March." Banking shares fell nearly R20 billion in March after Zuma replaced Gordhan with Malusi Gigaba as the finance minister and ratings agencies downgraded the country’s sovereign debt.
Nedbank started the year at R238 a share, rising to R241.50 in March, before falling to its current R216.20 by close of the JSE on Friday.
FirstRand, which was was R54.17 a share at the beginning of the year, slowed to R46.36 a share at the end of March.
At the close of trading on the JSE on Friday, the FirstRand stock was bid at R48.15, while Standard Bank followed suit, starting the year at R152.60 a share to ease to R143.75 a share at the end of March, before settling at R146.03.
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The cabinet reshuffle triggered sovereign credit rating downgrades by S&P Global and Fitch, citing heightened political tension and increased policy uncertainty as reasons.
The Banking Association of South Africa (Basa) said last month a sovereign downgrade was expected to have a serious impact on banks and the business sector in general. It would also undermine SA's collective ability to fund social programmes, which would severely worsen the lives of the poorest of the poor, Basa pointed out.
The SA Reserve Bank’s Financial Stability Report published last month warned that the prospect of further downgrades to the local currency rating had also raised concerns about South Africa’s inclusion in key global bond indices.