South Africa Banking Sector 2021 Outlook: Still Beset By Pandemic Woes - Samira Mensah Sahil Tribhowan - S&P Global
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South Africa Banking Sector 2021 Outlook: Samira Mensah
Sahil Tribhowan
Trevor Barsdorf
Benjamin Young
Still Beset By Pandemic Woes Feb. 11, 2021Key Takeaways
– Weak
Weakeconomic
economicgrowth
growthprospects
prospectsand
andlarge
largefiscal
fiscaldeficit
deficitwill
willweigh
weighononbanks’
banks’performance
performanceinin2021.
2021.After
Afteraasharp
sharprecession
recessioninin which
which
GDP shrank
GDP shrank
by an by
estimated
an estimated
7.3% 7.3%
in 2020,
in 2020,
we expect
we expect
GDP to GDP
grow
to by
grow
3.6%
by 3.6%
in 2021.
in 2021.
– The
Thegovernment
governmentfocused
focusedits
itsattention
attentionon
onthe
thepandemic
pandemicbut
butisisstill
stillformulating
formulatingvaccination
vaccinationplans.
plans.Strict
Strictlockdowns
lockdownsare
areunlikely
unlikelyto
to
return,
return,but
butwe
wedo
donot
notexpect
expectvaccines
vaccinesto
tobe
bemore
morewidely
widelyavailable
availableuntil
untilthe
thesecond
secondhalf
halfof
of2021.
2021.
– We
Weforecast
forecastthat
thatthethegrowth
growthofofcredit
creditto
tothe
theprivate
privatesector
sectorwill
willbe
besubdued
subduedinin2021.
2021.Credit
Creditleverage
leverage(private
(privatesector
sectorcredit
creditto
toGDP)
GDP)inin the
the
economy
economy
willwill
remain
remain
high
high
at about
at about
80% 80%
of GDP
of GDP
after
after
gradually
gradually
declining
declining
through
through
2020-2021.
2020-2021.
– Earnings
Earningsproved
provedresilient
resilientininthe
theface
faceof
ofrising
risingcredit
creditlosses
lossesinin2020-2021.
2020-2021.We
Weestimate
estimatethat
thatcredit
creditlosses
lossesrose
roseto
toabout
about1.8%
1.8%inin 2020
2020
and will
andmoderate
will moderate
to 1.4%
to 1.4%
in 2021;
in 2021;
nonperforming
nonperforming
loansloans
comprised
comprised
6% of6%
total
of total
loansloans
over this
overperiod.
this period.
– Although
Althoughtop-tier
top-tierbanks
banksare
areexposed
exposedtotowholesale
wholesaleshort-term
short-termdeposits,
deposits,these
theselargely
largelystem
stemfrom
fromdomestic
domesticnonbank
nonbankfinancial
financial
institutions.
institutions.We
Weexpect
expectliquidity
liquiditycoverage
coverageratios
ratiosto
toexceed
exceedthe
the80%
80%minimum
minimumset setby
bySouth
SouthAfrican
AfricanReserve
ReserveBank
Bank(SARB)
(SARB)ininA2020.
April 2020.
– We
Weconsider
considerthe
theregulatory
regulatoryframework
frameworksupports
supportsstability
stabilityininthe
thebanking
bankingsector.
sector.We
Weexpect
expectSARB
SARBto tolift
liftregulatory
regulatoryforbearance
forbearance
measures
measuresaround
aroundcapital
capitalrelief
reliefand
andliquidity
liquiditysupport
supportonly
onlygradually.
gradually.The
ThePrudential
PrudentialAuthority
Authoritytook
tookswift
swiftaction
actionto
tosupport
supportthe
the banking
banking
sector and
sector
the and
stability
the stability
of the capital
of the markets.
capital markets.
– This
Thiswill,
will,ininturn,
turn,support
supportbanks’
banks’strong
strongregulatory
regulatorycapital
capitallevels,
levels,despite
despitehigh
highearnings
earningspressure
pressurefrom
fromhigher
higherloan
loanimpairments
impairmentsinin
2020-2021.
2020-2021.COVID-19 Caused Economic Growth And Fiscal Consolidation To
Stall
– Strict lockdown measures in 2020 triggered a sharp economic contraction. The government is focusing on managing the spread of the
virus; its vaccination plan has yet to be finalized.
– Signs of recovery emerged in third-quarter 2020 and we expect a moderate rebound in 2021.
– This will, in turn, support slow fiscal consolidation in 2021- 2023. Nevertheless, real GDP will return to pre-pandemic levels only in 2023.
Real GDP Will Not Return To Pre-Pandemic Levels Until 2023
4
Real GDP growth
2
0 Real GDP per capita
2015 2016 2017 2018 2019 2020F 2021F 2022F 2023F growth
(2)
%
(4)
(6)
(8)
(10)
F--Forecast. Source: S&P Global Ratings.
3Lending Growth Will Remain Subdued
– We forecast credit to the private sector will grow by only 2%-4% in 2021.
– Both lenders and borrowers have been reluctant to use the government’s South African rand (ZAR) 200 billion loan guarantee scheme to
support small and midsize enterprises (SMEs) during the pandemic.
– Corporate lending growth has moderated over the past five years and mortgage growth has been stable.
Private Sector Credit To GDP Dipped In 2020, But Remains High Unsecured Lending Grew Faster Than Secured Lending
Consumer Credit Mortgages Corporate Total HH lending
88 18
Credit growth by asset class (%)
16
Private sector credit to GDP (%)
86
14
84 12
10
82
8
80 6
4
78
2
76 0
2017 2018 2019 2020F 2021F 2013 2014 2015 2016 2017 2018 2019
F--Forecast. Source: S&P Global Ratings. HH--Household. Source: South African Reserve Bank.
4High Credit Risks Show Few Signs Of Fading
– Systemwide provisioning levels have improved since 2017, partly because nonperforming loans now include more unsecured lending, and
the rules about impairment charges changed with IFRS 9.
– The shift toward unsecured lending changed the nature of leverage and pressured household income, creating a significant source of risk.
– Historically, provisioning at the major banks was moderate, given the level of economic risks and the high household debt metrics.
Banking Sector Credit Losses Spiked In 2020 Top-Tier Banks’ Nonperforming Loans And Coverage By Provisions
2.00 FirstRand LLR/NPL (left scale) NedBank LLR/NPL (left scale)
Standard Bank LLR/NPL (left scale) Absa LLR/NPL (left scale)
1.80
New loan loss provisions/average loans
FirstRand NPL ratio (right scale) NedBank NPL ratio (right scale)
1.60 100 10
1.40
80 8
1.20
LLR/NPL (%)
1.00 60 6
NPL ratio
(%)
0.80
0.60 40 4
0.40
20 2
0.20
0.00 0 0
2017 2018 2019 2020F 2021F 2016 2017 2018 2019 2020
Source: S&P Global Ratings. LLR--Loan loss ratio. NPL--Nonperforming loans. Source: S&P Global Ratings.
5Banks Have Learned To Accommodate Pockets Of Economic Stress
– Commercial real estate has shown growing signs of stress since 2017. Structural shifts have caused an increase in office vacancies which, combined with an extension of the
current lockdown measures, could weigh on performance to beyond 2021.
– The sluggish economic recovery and loss of income will magnify household debt in 2021, causing higher losses for banks from vehicle and asset finance and personal loans.
– More positively, moderate interest rates have kept residential house prices stable since 2015. SARB cut benchmark rates three times in 2020 but, given banks’ muted risk
appetites, we don’t expect bubbles to develop in the mortgage market.
Secured Lending Accounts For The Majority Of Banks’ Retail
Commercial Real Estate Exposures Are Largely Income Producing
Exposures
Corporate Project finance Personal loans / overdraft / RCF Retail mortgages
Object finance Commodities finance
Income producing commercial real estate HVCRE and construction loans Credit cards Vehicle and asset finance
60 80
70
50
60
40
50
30 40
%
%
30
20
20
10
10
0 0
Investec Nedbank Absa Standard FirstRand Investec Nedbank FirstRand Standard Absa
Ltd Ltd Group Bank Ltd Ltd Ltd Ltd Bank Group
Ltd Group Ltd Group Ltd Ltd
HVCRE--Highly volatile commercial real estate. SME--Small and midsize enterprises. Source: S&P Global RCF--Revolving credit facility. Source: Company financials. Data at December 2019 for Absa, Nedbank,
Ratings. Standard Bank, and FirstRand; March 2020 for Investec.
6South African Banks Maintained Its Capitalization Through The
Crisis
Top-Tier South African Banks Have Strong Regulatory Capital
– We expect top-tier banks’ Tier 1 ratio to reduce
by about 100 basis points in 2020.
CET1 ratio AT1 ratio Tier 2 ratio
– The Prudential Authority lowered the 2A
CET1 requirements Tier 1 requirements CAR total
18 capital buffer (systemic risk buffer) to zero to
help banks navigate the stress period and
16 allowed banks to draw down on their
14 conservation buffer, if needed. These capital
relief measures were intended to support
12 banks in extending credit during time of stress,
10 rather than to distribute dividends. The
regulator advised banks to suspend dividend
%
8
payments in 2020, but allowed them to pay
6 dividends that had already been approved for
distribution in 2020.
4
– Drawdown on conservation buffers must be
2
precleared with the PA, to ensure that banks
0 are not aggressively lending and remain well
Nedbank Group Standard Bank Investec Ltd. Group Absa Group FirstRand Group capitalized. South African banks are unlikely
Group to make use of the conservation buffer thanks
CET1--Common Equity Tier 1. AT1--Additional Tier 1. CAR--Capital adequacy ratio. Source: Banks' Pillar III reports, June 30, 2020. to resilient earnings. We expect most of these
Requirements are national minimums. Source: Company financials. Data as of December 2019 for Absa, Nedbank, Standard Bank, and buffers to be reinstated after 2022.
FirstRand; March 2020 for Investec.
7Funding Remains Stable And External Refinancing Risk Is Limited
– The South African banking sector is largely funded by customer deposits and domestic wholesale short-term deposits; contractual
savings tend to be dominated by professional money managers.
– Domestic rand liquidity was preserved during 2020 by resident exchange controls, which mitigate banks' exposure to institutional funding.
– Major banks are not exposed to large-scale refinancing risk or a reversal of investor sentiment because they do not rely on international
funding.
South African Banks’ Funding Profile Improved Prior To The
Foreign Currency Liabilities Are Limited For The Sector
Pandemic
Net banking sector external debt as a % of systemwide domestic loans 72
Liabilities in foreign currency as a % of systemwide liabilities 70
6
68
4
66
2
64
%
0
%
(2) 62
(4) 60
(6) 58
(8) 56
2017 2018 2019 2020F 2021F 2017 2018 2019 2020F 2021F
F--Forecast. Source: S&P Global Ratings. All rights reserved. F--Forecast. Source: S&P Global Ratings.
8South African Banking Sector Is Still Sound
– The pressure on earnings at South African banks is in line with that at most peers.
– We expect a gradual recovery after 2022, with return on equity and return on asset levels on par with pre-pandemic levels.
South African Banks’ Profitability Shows A Similar Pattern To Peer Banking Systems
Return on equity of domestic banks (left scale) Systemwide return on average assets (right scale)
25 2.5
Systemwide return on average assets (%)
Return on equity of domestic banks (%)
20 2.0
15 1.5
10 1.0
5 0.5
0 0.0
2017
2018
2019
2017
2018
2019
2017
2018
2019
2017
2018
2019
2017
2018
2019
2017
2018
2019
2017
2018
2019
2020F
2021F
2020F
2021F
2020F
2021F
2020F
2021F
2020F
2021F
2020F
2021F
2020F
2021F
South Africa Bahrain Russia Oman Thailand Brazil Morocco
F--Forecast. Source: S&P Global Ratings.
9Conservative Risk Appetite Shields South African Banks From
Higher Credit Losses
– Top-tier South African banks have been operating with a muted risk appetite and a stable and manageable level of foreign currency loans.
South African Banks’ Asset Quality Is Adequate, Compared With Peers
NPAs as a % of systemwide loans (left scale) Credit losses as a % of total loans (right scale)
15 5
Credit losses/total loans (%)
NPA/systemwide loans (%)
12 4
9 3
6 2
3 1
0 0
2017
2018
2019
2017
2018
2019
2017
2018
2019
2017
2018
2019
2017
2018
2019
2017
2018
2019
2017
2018
2019
2020F
2021F
2020F
2021F
2020F
2021F
2020F
2021F
2020F
2021F
2020F
2021F
2020f
2021f
South Africa Bahrain Russia Oman Thailand Brazil Morocco
NPA--Nonperforming assets. F--Forecast. Source: S&P Global Ratings.
10Sovereign Rating Caps Ratings On South African Banks
– Most top-tier banks have a stand-alone credit profile (SACP) of ‘bbb-’, but we cap our issuer credit ratings on them at 'BB-’, in line with the
sovereign rating on South Africa.
– The SACPs signify that the initial earnings shock of the 2020 pandemic is unlikely to have shaken their financial performance. The banks
have long used sound asset quality and robust regulatory capital buffers to withstand economic shocks. We estimate that their common
equity Tier 1 ratio could shrink by about 100 bps as a result of the stress of the pandemic.
– Our ratings on all domestic banks have a stable outlook, again, in line with our outlook on the South Africa rating.
– Banks’ ratings will move in tandem with the sovereign rating, but an upgrade is unlikely in the next 12 months. A negative rating action
would arise if economic prospects fail to recover during the forecast period and fiscal financing or external pressures mount.
Banks Ratings and Outlooks
SACP ICR National Scale Rating Outlook
Absa Bank Ltd. bbb- N/A zaAA/--/zaA-1+ N/A
African Bank Ltd. b B/B zaA-/--/zaA-2 Stable
Capitec Bank Ltd. bb BB-/B zaAA/--/zaA-1+ Stable
Investec Bank Ltd. bbb- BB-/B zaAA/--/zaA-1+ Stable
FirstRand Bank Ltd. bbb- BB-/B zaAA/--/zaA-1+ Stable
Nedbank Ltd. bbb- BB-/B zaAA/--/zaA-1+ Stable
SACP--Stand-alone credit profile. ICR--Issuer credit rating. Data as of Feb. 1, 2021. Source: S&P Global Ratings.
11Related Research
– South Africa Long-Term Foreign And Local Currency Ratings Affirmed; Outlook Stable, Nov. 20, 2020
– Central Banks In Africa Are Guiding Banks Through COVID-19 Economic Fallout, July 22, 2020
– Banking Industry Country Risk Assessment: South Africa, June 30, 2020
– Various Rating Actions Taken On South African banks Following Sovereign Downgrade, May 7, 2020
– South Africa Banking Outlook: A Weak Economy Overshadows The Sector’s Resilient Performance, Feb. 3, 2020
12Analytical Contacts
Samira Mensah Trevor Barsdorf
Senior Director Associate Director
Samira.mensah@spglobal.com Trevor.barsdorf@spglobal.com
Sahil Tribhowan Benjamin Young
Associate Director Director
Sahil.tribhowan@spglobal.com Benjamin.young@spglobal.com
13Analytical Contacts
Mohamed Damak
Ravi Bhatia
Director Senior Director
Ravi.bhatia@spglobal.com Mohamed.damak@spglobal.com
Tatonga Rusike Charlotte Masvongo
Associate Director Rating Analyst
Tatonga.rusike@spglobal.com Charlotte.Masvongo@spglobal.com
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