JOHANNESBURG - South Africa’s low economic growth will weaken the country’s banks’ loan quality and profitability in the next 12 to 18 months, with rating agency Moody’s yesterday maintaining a negative outlook on the country’s banking system.

The rating agency said its views were consistent with the current negative outlook on the government rating and on the large banks’ ratings. Nondas Nicolaides, a senior credit officer at Moody’s, said the banks’ creditworthiness would come under pressure over the next 12 to 18 months.

“We expect interest margins to come under modest stress following years of steady gains, as waning demand for credit amid rising asset risks could lead banks to ramp up competition for prime clients, limiting their ability to fully reprice current loan books in tandem with the high repo rate. “At the same time, banks’ returns from their unencumbered capital will also fall due to the lower repo rate, while maturing loans will be reinvested at lower yields than last year, negatively affecting interest income,” Nicolaides said.

In July, the SA Reserve Bank Monetary Policy Committee took the markets by surprise when it lowered its benchmark repo rate by 25 basis points to 6.75percent, its first interest cut since 2012. Graeme Körner, a fund manager at Körner Perspective, said administrative prices such as high food prices, and rates and taxes had squeezed the consumer, but banks were saved by the National Credit Act.

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“The South African banks are well stocked with risk covered assets, such as home loans which are reasonably good, those assets have shielded banks,” Körner said. Moody’s said it expected banks’ credit risk profile to increase, with non-performing loans rising to around 3.5percent of total loans by the end of 2018, from 2.9percent in December 2016.

The rating agency also said the banks’ return on assets would be around 1percent in 2017/18, down from 1.3percent in May of this year. S&P Global Ratings (S&P) earlier in the year said the outlook for the big South African banks remained negative, but pressure was easing.

S&P further warned that South African banks would not derive any earnings joy from their rest of Africa operations this year while the high indebtedness of South African households posed a major risk to the banking sector. In March, professional services firm PricewaterhouseCoopers said that South Africa’s major banks continued to post robust profits for the year ended December, despite facing economic headwinds during the period.

The auditing firm analysis on the performance of the country’s big banks showed that Barclays Africa, Nedbank, FirstRand and Standard Bank posted combined headline earnings of R72.3billion on an annualised basis during the period, up 8.4percent from the similar period last year. Nicolaides said the rising loan delinquencies would lead to higher loan-loss provisioning, putting further pressure on banks’ profitability.

“Provisioning had been declining for the five largest banks in recent years, but we expect these impairment costs to rebound in line with rising NPLs. “We also expect banks to increase their provision coverage ratios, as subdued macro conditions and potential pressure on collateral values will lead to lower recoveries on problematic loans.”