“Weak real GDP growth and the likelihood of an interest-rate increase will exert pressure on asset-quality and constrain corporate business development, while the banks’ large domestic government exposures links banks’ credit profiles to the South African government,” Nondas Nicolaides, Moody’s vice president and senior analyst said in a statement.
In a new Moody’s report entitled “Banking System Outlook: South Africa”, the banks’ substantial holdings of domestic sovereign securities, expected asset quality pressures and funding challenges are factors that will contribute to the maintenance of a negative outlook for the sector.
"Whilst the South African government faces political and budgetary pressures alongside high inequality and unemployment, funding challenges will also persist for banks, owing to their reliance on short-term wholesale deposits,” Nicolaides explained.
“The latter will make it difficult for the banks to fully meet the Basel III liquidity requirements."
(READ MORE: S.Africa's banking landscape growth hampered by poor economic performance)
Weak prospects for private consumption and investment, as well as the deteriorating unsecured retail lending market in the past 18 months, will see additional pressure on asset quality among banks.
(READ MORE: Capitec rides tough lending climate)
According to the report, non-performing loans in the system are expected to increase and thereafter range between 4.0 per cent and 4.2 per cent of gross loans in 2014 and 2015. This will be a significant acceleration from a reported 3.7 per cent in December 2013.
“South African banks’ credit profiles are closely linked to the sovereign's creditworthiness, in view of the banks’ holdings of government securities that accounted for approximately 135 per cent of their Tier 1 capital on average as of December 2013,” said Moody’s.
“As such, downward pressure on the largest banks’ standalone profiles would develop if South Africa's credit profile deteriorates.”
The rating agency however explained that banks will continue to maintain solid liquidity profiles, which will slightly reduce some of the risks stemming from the asset-liability mismatches.