South Africa banking system outlook remains negative

The outlook for South Africa's banking system remains negative, Moody's Investors Service said in a new report but that the banks' resilient core earnings-generating capacity and ample capital buffers partly offset the negative drivers.
The rating agency said the outlook reflects the sluggish operating environment which will weaken asset quality and increase provisioning needs; the banks' sizable holdings of sovereign securities, linking bank credit profiles to that of the government of South Africa (Baa1 negative); and, funding challenges due to reliance on short-term wholesale deposits.
Over the 12-18 month outlook period, in the context of sluggish economic growth, Moody's expects that the poor prospects for exports and private consumption will limit banks' credit growth and new corporate business opportunities, and prompt a rise in non-performing loans (NPLs).
Following a deceleration in GDP to 2% in Q2 2013, from 3.1% in Q2 2012, Moody's forecasts South Africa's real GDP to grow by around 2.2% in 2013 (2014: 3.2%), well below both the pre-crisis 2004-08 average of 4.9% and the 4%-7% rate the government views as necessary to fully utilise manufacturing capacity, reduce high unemployment and improve living standards.
Although government-exchange controls contain rand liquidity within the system, Moody's expects that South African banks will continue to remain highly dependent on local short-term wholesale deposits, which creates large asset-liability mismatches, high funding costs and deposit concentrations.
As a result, South African banks will not be able to meet the proposed net stable funding ratio (NSFR) under the Basel III liquidity framework, although implementation is not due until 2018.
However, as they continue to build up their core liquidity, Moody's expects that the banks will be able to maintain solid liquidity profiles, which will ease some of the risks stemming from the asset-liability mismatches.