“South African banks that we rate continue to have negative outlooks. We don’t rate banks in South Africa above the sovereign foreign currency rating because of the direct and indirect influence that domestic economic performance has on banks’ financial performance,” said Standard & Poor’s (S&P) credit analyst, Matthew Pirnie.
“Downside risks to the South African economy will weigh on the credit prospects of domestic banks over the coming year. Lacklustre economic growth, labour tensions, and the high current account deficit that is predominantly funded by volatile portfolio flows have led us to assign a negative outlook on the sovereign.”
The credit ratings agency added that it doesn’t expect to raise ratings on South African banks in 2014 and that the country’s banks face other potential pressure points on their credit quality this year.
“A rise in inflation and interest rates, or a significant drop in real estate prices could increase their credit risks and restrain earnings. In the absence of financial system-wide shocks, we expect the banks will maintain stable earnings, asset quality, and capitalisation,” said S&P.
“We also expect banks will achieve modest loan growth, supported by the return of mortgage lending and a small peak in credit losses at year-end 2013 followed by an improvement throughout 2014. Over the long term, South African banks’ continuing expansion into other African markets could also expose them to economies with higher credit risks.”
The country’s Reserve Bank is expected to announce its decision on interest rates on Wednesday, following three days of deliberations.