In its Banking Industry Country Risk Assessment (Bicra) for South Africa, S&P said it estimated the country’s per capita gross domestic product at about $6000 (R78000) for this year, which in US dollar terms was still lower than in 2010.
The National Credit Regulator (NCR) said about 10million South Africans were over-indebted, which meant they were unable to meet their financial obligations timeously.
Matthew Pirnie, an analyst at S&P, said the rating agency expected very modest growth in retail lending over the next 18 months as the low economic growth, rising unemployment, and political uncertainties continued to confine consumer confidence.
“We continue to believe that domestic households pose the most significant source of risk for the banks because of their relatively high leverage and low wealth levels compared with other emerging markets,” Pirnie said.
In testimony before South Africa’s legislators last year, Nomsa Motshegare, NCR chief executive, said as at the end of September 2015 the country’s gross debtors’ book stood at a whopping R1.6trillion, while the total credit rand value of new credit granted to consumers was close to R124bn.
Macro-economic statistics website Trading Economics said household debt-to-income in South Africa averaged 57.28percent from 1969 until last year, reaching an all-time high of 86.4percent in 2008 and a record low of 40.3percent in 1980.
Other weaknesses S&P flagged about the country's banking sector included multiple development needs, supply and skill shortages, including infrastructure bottlenecks, as well as labour market rigidities that constrained economic growth potential.
The rating agency also said the financing of the country's current account deficit hinged on potentially volatile portfolio flows, while the sector relies on concentrated short- to medium-term funding from institutional investors, but the risk was mitigated by the closed rand system.
S&P found that in the year to March, credit impairments improved to 1.2percent of total loans from 1.4percent, at the same time the sector’s total capital adequacy increased to 16.05percent from 13.88percent and return on equity improved to 17.33percent from 16.31percent.
Pirnie said a positive for the sector was that South African households and corporates had somewhat prepared for long-term economic and political instability by minimising leverage over the past few years.
“We see the trend for banking industry risk as stable because we consider the significant deterioration of South African banks’ profitability or funding profiles as unlikely. If the banks become more reliant on more volatile funding or change to a net debtor position, we could lower our assessment,” he said.
Earlier in the year, S&P said its outlook for the big South African banks remained negative but that pressure was easing. However, it said the rest of Africa operations would represent a drain on some of the country's banks' profitability over the next 12 months.
Among the positives noted in the Bicra was that the country's regulation was in line with international best practices, while it had top-tier banking stability and good risk management.
Ernst & Young’s analysis of the major South African banks earlier this year found the banks had produced credible results against economic headwinds, with the four major banking groups having posted combined profits of R72.3bn in the year to December, up 8.4percent on an annualised basis from 2015.