A SECOND major rating agency has flagged the
effect of rising interest rates on South African consumers, saying the
hikes pose higher credit risks for banks.
Standard & Poor’s (S&P) on Thursday said top-tier banks would face credit losses of between 0.9% and 1.2% on their lending activities this year.
This is expected to worsen another 20 basis points next year, reflecting the agency’s negative outlook on the banks it rates in South Africa.
The agency had changed the outlook to negative at the end of last year, reflecting its downbeat view on SA’s credit rating; deceleration in growth; rising interest rates; and inflationary pressures on banks’ asset quality, said S&P credit analyst Matthew Pirnie.
At its meeting last month, the Reserve Bank’s monetary policy committee revised down its growth forecasts for this year and next year from 0.9% and 1.6% to 0.85% and 1.4% respectively.
In its second hike this year, it raised interest rates 25 basis points to 7%, taking the prime lending rate to 10.5%.
Earlier this year, rival agency Moody’s said it expected banks’ asset quality to deteriorate after the Bank raised interest rates 50 basis points in January.
It viewed the move as credit negative for the banks because it said higher rates would affect borrowers’ ability to afford and repay debt.
Moody’s vice-president Nondas Nicolaides had said, however, that lending to corporate entities could help bolster asset quality, as there was more money in that segment.
S&P has found that this segment outperformed other lending books, mainly due to fast growth in domestic infrastructure — particularly renewable energy — African expansion, and inflationary domestic expenditure.
"We nevertheless think corporate lending will struggle to reach the average 10% growth rates accomplished over the past five years, given our expectations of lower government and infrastructure spending; less attractive continental expansion; reduced economic activity from key export partners; (and) generally sluggish growth and the weak rand," Mr Pirnie said.
S&P said these trends suggested deterioration in the quality of the corporate book, especially for small businesses.
"Standard & Poor’s data show that South African corporates’ Ebitda (earnings before interest, taxes, depreciation and amortisation) has reduced slightly over the past five years, particularly the past two," the report said. "This excludes the mining sector, which, if included, would materially drag down the performance of the entire corporate sector."
A review of the 2015 annual reports of the four largest banking groups — Standard Bank, FirstRand, Barclays Africa, and Nedbank — showed they had an exposure of about R1.4-trillion to the corporate sector. Barclays Africa has already reported corporate book credit losses, although it did not specify numbers.
Banks’ expansion into the rest of the continent appeared less attractive this year which was likely to limit appetite for growth and raise credit costs, S&P said.
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| Standard & Poor’s primary credit analyst Matthew Pirnie. |
Standard & Poor’s (S&P) on Thursday said top-tier banks would face credit losses of between 0.9% and 1.2% on their lending activities this year.
This is expected to worsen another 20 basis points next year, reflecting the agency’s negative outlook on the banks it rates in South Africa.
The agency had changed the outlook to negative at the end of last year, reflecting its downbeat view on SA’s credit rating; deceleration in growth; rising interest rates; and inflationary pressures on banks’ asset quality, said S&P credit analyst Matthew Pirnie.
At its meeting last month, the Reserve Bank’s monetary policy committee revised down its growth forecasts for this year and next year from 0.9% and 1.6% to 0.85% and 1.4% respectively.
In its second hike this year, it raised interest rates 25 basis points to 7%, taking the prime lending rate to 10.5%.
Earlier this year, rival agency Moody’s said it expected banks’ asset quality to deteriorate after the Bank raised interest rates 50 basis points in January.
It viewed the move as credit negative for the banks because it said higher rates would affect borrowers’ ability to afford and repay debt.
Moody’s vice-president Nondas Nicolaides had said, however, that lending to corporate entities could help bolster asset quality, as there was more money in that segment.
S&P has found that this segment outperformed other lending books, mainly due to fast growth in domestic infrastructure — particularly renewable energy — African expansion, and inflationary domestic expenditure.
"We nevertheless think corporate lending will struggle to reach the average 10% growth rates accomplished over the past five years, given our expectations of lower government and infrastructure spending; less attractive continental expansion; reduced economic activity from key export partners; (and) generally sluggish growth and the weak rand," Mr Pirnie said.
S&P said these trends suggested deterioration in the quality of the corporate book, especially for small businesses.
"Standard & Poor’s data show that South African corporates’ Ebitda (earnings before interest, taxes, depreciation and amortisation) has reduced slightly over the past five years, particularly the past two," the report said. "This excludes the mining sector, which, if included, would materially drag down the performance of the entire corporate sector."
A review of the 2015 annual reports of the four largest banking groups — Standard Bank, FirstRand, Barclays Africa, and Nedbank — showed they had an exposure of about R1.4-trillion to the corporate sector. Barclays Africa has already reported corporate book credit losses, although it did not specify numbers.
Banks’ expansion into the rest of the continent appeared less attractive this year which was likely to limit appetite for growth and raise credit costs, S&P said.
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