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South African banks earnings to drop in 2016

South African banks earnings to drop in 2016

CAPE TOWN: South African banks’ earnings will be lower in the year ahead after interest-rate increases cut consumers’ ability to repay loans and their appetite for debt, according to Moody’s Investor Service.

“Borrowers’ reduced debt affordability will have a knock-on effect on banks’ asset quality, reversing the improving trend of non-performing loans during the past few years,” the ratings company said Monday in an e-mailed statement.

Together with forecasts for slower economic growth, the strain on South African households will lead to increased bad loans and weaker gains in lending, it said. Banks may need larger loan-loss provisions, eroding their profitability. “We expect the effects to show in lower earnings growth and weaker profit metrics,” Moody’s said.

The South African Reserve Bank increased its benchmark interest rate by 50 basis points to 6.75 percent on Jan. 28. While the so-called endowment effect means banks often increase profit when they earn more interest on the capital they have loaned out, interest rates rising higher and faster than expected may cause mounting bad debts to cancel out any benefit. Lenders must also contend with a slowing economy, higher funding costs, reduced demand for debt and global Basel III requirements that force them to hold more capital.

“We also expect pressure on their net interest margins,” Moody’s analysts Nondas Nicolaides and Antypas Asfour, said in the statement. “The average net-interest margin for the system in October 2015 was around 3.8 percent, which supports banks’ profit metrics, but which are now likely to deteriorate over the next 12 to 18 months.”

South Africa’s seven-member banks index has declined 1.5 percent this year, with Capitec Bank Holdings Ltd. the worst performer and down 13 percent. FirstRand Ltd., Africa’s biggest bank by value, is the only gainer, having climbed 3.4 percent.