Standard & Poor's: SA's Banking System Remains Sound Despite Deteriorating Asset Quality

South Africa's banking sector's stable competitive structure and sound financial regulation have limited banks' exposure to external events, Standard & Poor's Ratings Services noted in a new report titled "Banking Industry Country Risk Assessment: South Africa."

However, these factors are offset by our view of weaknesses in South Africa's economic structure, including wide social inequalities, and vulnerability to deterioration in the quality of loans to households, which carry a relatively high level of debt.

In a global context, we consider the banking sector of the Republic of South Africa (local currency A+/Negative/A-1, foreign currency BBB+/Negative/A-2) to be of moderate risk. We have therefore placed South Africa's Banking Industry Country Risk Assessment (BICRA) in Group 5 similar to banking systems in Bahrain, Poland, Kuwait, and Brazil.

The BICRA ranking reflects our view on the strengths and weaknesses of a country's banking system relative to other countries (out of 10, one is the strongest).

Nevertheless, we believe South Africa hasn't been immune to the global economic slowdown. Throughout 2009, unemployment and corporate defaults continued to rise, and house prices fell by around 10% on average.

Impaired advances increased to 5.95% of gross advances at Dec. 31, 2009, from 3.08% at Sept. 30, 2008. Household lending, especially mortgages, has been the largest contributor to nonperforming loans, which is unsurprising to us given the high levels of household indebtedness in South Africa. Positively, levels of corporate debt remain relatively low compared to peers in the emerging market.

We believe that in a severe and prolonged economic downturn, the cumulative gross problematic assets of system wide South African loans could reach 10%-20%.

This compares well to other countries in BICRA Group 5.