In a move that bucked broader trends on the Johannesburg Stock Exchange (JSE), South Africa’s banks saw their share prices jump in 2016, underpinned by a recovery in the commodities market, higher interest earnings and a vote of confidence from ratings agencies.
Standard Bank, Nedbank, Capitec and FirstRand all featured in the list of the top-10 performers on the exchange, gaining between 30% and 40% year-on-year (y-o-y). While the broader sector delivered a more modest performance than the majors, the JSE banks’ index, which covers all listed lenders, rose 26.9% over the year, eclipsing the exchange’s Top 40 Index, which slipped by 4.14%.
A decision by international ratings agencies to maintain South Africa’s sovereign credit rating was a key factor in the sector’s strong showing. With the economy teetering on the brink of recession, speculation had grown through 2016 that a downgrade to junk status could be on the horizon.
However, in its November report on the South African economy, Fitch said the banking sector remained strength despite weak macroeconomic conditions, evidenced by rising capital adequacy ratios.
Buoyed by forecasts of higher growth this year, local banks head into 2017 in a stronger position than 12 months ago, when political uncertainty and a slowing economy threatened to weigh on share prices and earnings.
Nonetheless, rising levels of unproductive loans and lower demand for credit may take some of the heat out of the sector in the coming months, with more modest growth forecast for 2017.
Fitch expects South Africa’s economy to grow by 1.3% in 2017, up from 0.5% last year, and maintained its rating for the banking sector at “BBB-”, though it revised its banking outlook from stable to negative.
The firm cited high exposure to domestic sovereign debt relative to capital, and the fact that most operations undertaken by South Africa’s banks are carried out locally, as the two main reasons for its decision, noting that any further economic headwinds risked negatively affecting the banking sector.
“Negative sentiment around sovereign creditworthiness may lead to a drain on liquidity in an extreme scenario and reduce access to debt capital markets for the banks, triggering a negative rating action,” the agency noted.
A slowdown in credit growth could also weigh on the industry’s performance. Data issued by the South African Reserve Bank at the end of December showed private sector credit growth easing to 4.6% y-o-y in November from 6.1% the previous month.
Pressure is also set to come from an expected increase in non-performing loans (NPLs) in the new year. In November Moody’s warned that the NPL ratio could reach 4% of total assets by the end of 2017, up from 3.2% late last year.
Banks with high exposure to US dollar- or euro-denominated debt saw their positions weaken in 2016 as the rand lost ground against most major currencies, albeit with less of an impact than originally forecast in early 2016.
After a sharp decline at the beginning of the year, when the currency fell to R17.9:$1, the rand clawed back some of its losses to close out the year at R13.6:$1.
Further volatility in the markets, a stronger dollar and the lingering shadow of a potential ratings downgrade could continue to weigh on the rand and borrowing costs throughout 2017. However, widely forecast resurgent growth in the latter half of the year, along with an expected stabilisation of the dollar, could see the currency make fresh gains and reduce pricing pressure on overseas borrowing.