SA banking industry stable, for now

By on March 12, 2014

Global Credit Ratings (GCR) recently announced its South Africa Bank Bulletin results and it shows that the industry as a whole is stable, but it is not completely out of the woods just yet.

The GCR South Africa Bank Bulletin gives an outlook and overview of the latest developments in the economy, regulatory environment, and banking industry in South Africa.

Dirk Greef, Sector Head: Financial Institution Ratings at GCR, says, since 2003, South Africa has averaged quarter-on-quarter real GDP growth of around 3.3 percent, reaching a high of 7.2 percent in 3Q of 2004 and a low of negative 6.3 percent in 1Q 2009.

“Overall, South Africa evidenced a seasonally adjusted and annualised real (SAAR) reduction in GDP at constant 2005 prices of 2.5 percent in 2012 (2011: 3.5 percent; 2010: 3.1 percent), to register the first deceleration in GDP on an annual basis since 2010.”

He says financial soundness indicators remain strong although rising risks from unsecured lending have been noted, given the high household debt burden. “Consequently, should the interest rate cycle turn and/or house prices fall, at the current elevated debt levels, the household sector and related credit providers exposed to this sector could be very vulnerable,” explains Greef.

He says the subdued economic growth is attributed mainly to labour unrest in the mining and agricultural sectors that crippled production. “A major turning point was the strike at Lonmin’s Marikana platinum mine, marking the mid-point of 3Q. In addition, South Africa’s largest trading block (the Euro zone) slid into a recession over the same period, thereby impacting export volumes.”

Furthermore, Greef says the South African Reserve Bank (SARB) has highlighted the weak economic performance and recurring labour market tensions as a significant threat to the outlook for South Africa’s financial stability and sovereign credit rating.

“The International Monetary Fund also pinpoints the need to improve home-host cooperation among regulatory authorities given South African banking groups’ expansion into the African continent. The implementation of Basel III in January 2013 and the planned implementation of the Twin Peak approach for financial regulation, among other initiatives, is expected to further enhance financial stability going forward,” explains Greef.

He says the inflation reading remained elevated during 2013, after declining to a review period low of 5.5 percent in June 2013, and has subsequently breached the upper limit of the target at 6.3 percent. “The weaker currency has exacerbated South Africa’s imported inflation (including that derived from fuel).”

The SARB has indicated that Consumer Price Index (CPI) inflation is forecast to average 5.9 percent in 2013, with a temporary breach of the inflation target range in 3Q. “The most recent inflation projects for 2014 are for an average of 5.5 percent. The risk to the inflation outlook remains elevated, given the Rand’s depreciation and possible second round inflationary pressures arising,” explains Greef.

SARB has indicated that global developments continue to affect South Africa’s economic growth and inflation outcomes, but a range of domestic factors have become relatively more prominent.

“The domestic economic landscape worsened as a result of widespread labour market instability, with a general rise in uncertainty and a decline in confidence. As a result, the outlook for domestic economic growth has deteriorated, with the balance of risks to the downside.

“However, the SARB also took time to highlight the upside risks to the inflation outlook, on the back of the currency weakness. As such, the current monetary policy stance looks set to remain unchanged, with the upside risk of a tightening in interest rate increasing,” concludes Greef.

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