Moody’s Investors Service downgraded its outlook for the local banking system for the first time in 2020, saying the sharp deterioration in the economy because of the coronavirus outbreak will lead to a rise in bad loans as customers struggle to stay afloat.
The ratings company, which moved the country’s big banks into junk status on March 31 to put them in line with the government's rating, said it expected problem loans for SA’s big banks to exceed levels reached during the financial crisis of 2008/2009.
So-called problem loans in which customers are behind schedule and the bank cannot be sure of being repaid are at 4% of gross loans and could “rise significantly” to more than the peak during the financial crisis, which was about 6%, Moody’s said.
“We expect households, SMEs and borrowers in sectors such as tourism and mining to be hit hardest by the coronavirus outbreak,” Moody’s said. “Construction and commercial real-estate sectors also will suffer due to the economic contraction and low business and consumer confidence.”
Moody’s, the last of the big agencies to strip SA of its investment-grade rating, said on Friday that the government’s R500bn plan to mitigate the effect of the Covid-19 outbreak and the resulting lockdown would have little effect on the economy.
Banks that have reported financial results in recent weeks, including Capitec, which decided to withhold dividends in line with recommendations from the Reserve Bank, have already shown signs that customers are stressed, increasing provisions for bad loans.
Nedbank in April scrapped its 2020 earnings guidance, while Standard Bank said in its earnings report for the quarter to end-March that credit impairment charges — or money taken from profit to cover potential loan losses — were “significantly higher”.
Moody’s downgraded its 2020 GDP forecast for the country to a 6.5% contraction. Political tension and lack of economic reform will further erode business confidence, hurting banks’ growth prospects over the next 12-18 months. It changed banks’ outlook to negative from stable.
Moody’s expects a deterioration in the big banks capital ratios — holdings of cash against losses — as a result of lower earnings and despite low loan growth and regulatory capital relief which its says, will provide “some support”.
The Reserve Bank has announced unprecedented interventions in recent weeks to help banks navigate the economic fallout of the Covid-19 pandemic. This has included new measures for banks to borrow from the central bank, a 200-basis point cut in interest rates, and a loan guarantee scheme which insures them against a portion of losses incurred from extending loans to distressed businesses.
Moody’s has previously cited banks’ large exposure to SA government bonds, which they are required to hold as part of statutory capital reserves and which links their credit profiles to that of the government, as problematic.
“The fallout from the outbreak will weaken the creditworthiness of SA banks by hurting loan performance and profitability and severely hampering business growth,” Moody's said. The banks may get some support from the government’s fiscal package as well as steps by the Bank to ease tension in markets and loosen capital requirements, it said.
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