Johannesburg - The high indebtedness of South African households posed the most significant risk to the country’s banks this year due to their relatively high leverage and wider income disparities compared to other emerging markets.
This is according to rating agency Standard and Poor’s (S&P), which on Thursday said the outlook for banks remained negative, but the pressure on them was easing.
S&P said while household debt to disposable income had been gradually decreasing over the past few years, the nature of the leverage had changed from the secured residential mortgages to more unsecured lending and instalment credit.
“We believe this reflects two trends: first, the quicker deleveraging of the wealthy versus the middle and lower-income markets; and second, a tightening of credit policies restricting access to long-term secured credit in favour of shorter-term higher margin loans,” S&P said.
“Declining affordability for South African households can best be illustrated by the debt service-to-disposable income ratio, which increased to 9.3 percent in 2015 from 8.7 percent in 2012,” S&P said.
S&P said it expected interest rate rises of 25 to 75 basis points over the next 12 to 18 months and inflation of 6 percent to
7 percent, which would further pressure household affordability.
Ian Cruickshanks, chief economist at the SA Institute of Race Relations, said corporates should make profits to be in a position to service debt.
“When we are looking at economic growth of just above
1 percent this year then clearly a lot of companies would not post profits, which means they would not be able to pay off their loans and the banks have to sit with bad debt,” Cruickshanks said.
S&P said apart from pressures faced by households in servicing their debts, corporate books would also depreciate.
“Our data shows that South African corporates’ earnings before interest, tax, depreciation and amortisation (ebitda) margins have reduced slightly over the past five years, particularly the past two,” the agency said.
“This excludes the mining sector, which if included would materially drag down the performance of the entire corporate sector.”
The ratings agency said it expected credit losses for the top-tier banks of between 0.8 percent and 1 percent next year.
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Despite the challenges facing the sector, S&P said South Africa’s big banks would, however, continue to be resilient and post robust profits.
Last year, PriceWaterhouseCoopers released its analysis of South Africa’s major banks which found they remained resilient in a tough trading environment.
The report said that in the six months ended June 30, 2016, the banks reported a combined headlines earnings of R34.6 billion, up 5.7 percent from the comparable period in 2015.
The banks’ combined return on equity (ROE) fell slightly from 18.2 percent to 17.6 percent while operating income had risen 13.3 percent.
According to S&P, the domestic banking sector’s ROE was expected to stabilise at 15 percent to 19 percent for the next couple of years as the positive effect of the gradual rise in interest rates is mitigated by increasing provisions and cost of funds.
Graeme Körner, a fund manager at Körner Perspective, said administrative prices such as high food prices, rates and taxes had squeezed the consumer but banks were somewhat saved by the National Credit Act.
“South African banks are well stocked with risk-covered assets such as home loans which are reasonably good - those assets have shielded banks,” he said.