JOHANNESBURG – South Africa's financial sector yesterday received a boost from Moody’s with the rating agency upgrading its outlook on the local banks from negative to stable.

Moody's said the changes came on the back of the resilience that the banks had shown in recent months.

Nondas Nicolaides, a Moody’s senior credit officer, said they expected the banks’ creditworthiness to remain resilient in the next 12 to 18 months.

“South African banks report solid capital metrics well above regulatory minima, and our central scenario is that capital buffers will remain resilient and protected by profits.”

Moody’s, however, warned that slow economic growth would hurt the banks' new business and revenues.

“We expect the performance of bank loans to be somewhat challenged by South Africa's weak economy, which will strain borrower cash flows and make it more difficult for borrowers to manage loan repayments.”

The agency said during the first six months of this year, impaired loans increased to R137.3 billion from R108bn in the six months ended December. A PricewaterhouseCoopers (PwC) study on the four biggest banks in the country showed the lenders posted combined profits of R40.4bn in the six months ended June, up 12.1 percent year on year compared with the first six months of 2017.

The auditing firm, however, said a range of economic, competitive and wider social challenges that lay ahead could affect the banking industry.

“The major banks remain resilient and continue to have robust capital adequacy levels which have been a feature of the South African banking system over many years,” said Johannes Grosskopf, financial services leader for PwC Africa.

The Moody’s review has shifted the banks’ exposure to corporates. The agency said its data showed that corporate exposure comprised 37.6 percent of sector-wide loans as of March this year, up from 31.5 percent in 2010, while retail/household exposure fell to about 34.9 percent from 42 percent over the same period.

“Over the last few years, South African banks have increased their lending to corporates, which has benefited their asset risk. The cash flow of South African corporates is more resilient than households,” Moody’s said.

South African big banks have warned that expropriation of land without compensation might trigger a financial crisis and weaken the economy further. The Banking Association of South Africa told legislators banks had invested about R1.6 trillion of South Africans’ savings, salaries and investments into property loans. It added its data showed the big four banks’ loans to commercial farmers had increased to R148bn at the end of June, from R133bn at December 2017.

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– BUSINESS REPORT