South Africa's banks will find it tougher to turn a profit as the economy remains feeble for the next few years and credit risks rise, credit ratings agency Standard & Poor's said on Thursday.
Consumers, squeezed by rising interest rates, unemployment of around 25 percent and high debt levels, are a growing headache for lenders in Africa's most advanced economy which is forecast by the government to grow by only 0.9 percent this year after expanding by 1.3 percent in 2015.
"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," S&P said in a report.
Lending to corporates, which has propped up the financial sector as companies borrowed to grab a share of South Africa's infrastructure spend and to expand into the rest of the continent, is slowing according to the ratings agency.
"Corporate lending will struggle to reach the average 10 percent growth rates accomplished over the past five years," S&P said.
The ratings agency sees external and domestic economic factors putting pressure on the credit costs of South African banks into early 2017.
"We expect credit losses for the top-tier banks to range between 0.9 percent and 1.2 percent in 2016 and to worsen by another 20 basis points into 2017," S&P said.
The nation's largest four banks all reported higher profits last month, Standard Bank leading the pack with a 27 percent rise in full-year earnings, but warned that the year ahead could be tough, especially if South Africa's sovereign credit rating is slashed.
South Africa's credit rating is under threat of a downgrade to "junk" status due to policy inconsistencies and low growth, despite an austere budget tabled by Finance Minister Pravin Gordhan in February.