Moody's lowers South Africa's banking system outlook to negative.

By bne IntelliNews December 6, 2012
Moody's Investors Service has lowered its outlook for South Africa's banking system to negative from stable, citing weak domestic macroeconomic conditions, sizable holdings of government securities and the banks increasing reliance on short-term wholesale deposits. The global ratings agency said in its Banking System Outlook: South Africa that the operating environment in South Africa will elevate credit risks and pressure banks' asset quality and profitability metrics. Moodys expects the countrys economy to expand by about 2.5% this year and by 3% in 2013, which is below the rates needed to fully utilise manufacturing capacity, tackle high unemployment and substantially improve living standards. The weakened domestic environment would result in subdued credit growth and new corporate business opportunities for banks over the 12-18 month outlook period, which would put additional pressure on the banks' asset quality and profitability, the agency said. It added that the sizable holdings of government securities, accounting for more than 150% of system Tier 1 capital on average for the largest banks, will continue to link the banks' credit profiles to South Africa's creditworthiness (Baa1 negative), which is under pressure from economic and fiscal headwinds. In addition, weaker economic growth and the seasoning of the unsecured retail loans will likely exert upwards pressure on non-performing loans (NPLs), which stood at 4.4% of gross loans as of August 2012 following an improvement over the last two years, Moodys said. The agency expects South African banks to continue to face structural funding challenges because of the high level of disintermediation in South Africa and their high, and increasing, dependence on local wholesale institutional deposits (mainly from money market funds, insurance companies, and pension funds), which causes large asset-liability mismatches, higher funding costs and high deposit concentrations. The structural funding challenges are likely to be exacerbated by Basel III's liquidity requirements, as the net stable funding ratio (NSFR) requires banks' longer-term funding to match long-term assets. Moody's said also that the negative pressures are partly mitigated by banks' resilient core earnings generating capacity, and by its expectations that the banks will maintain their capital buffers ahead of Basel III implementation. The agency expects the banking systems capitalisation to remain sound at around current levels over the next two years, with an overall Tier 1 ratio of 11.99% and an equity-to-assets ratio of 7.13% as of August 2012.

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