South African bank outlooks remain negative but the pressure is easing

The outlooks on all rated South African banks remain negative at the start of 2017, continuing to reflect the combined pressures of weak economic growth and the persistent credit risk of over-leveraged households.

We expect GDP growth in 2017 to improve to a still modest 1.4% from 0.5% in 2016. At the same time, the impetus for rapid interest rate rises is declining, reflecting low economic growth and inflation just outside the publicized range of the South African Reserve Bank. As a result, we expect the downside risks will continue to lie dormant for the domestic banking sector and therefore credit losses for the top tier banks of between 0.8% and 1.0% in 2017.

We expect the domestic banking sector's return on equity to stabilize at 15%-19% for the next couple of years as the positive effect of the gradual rise in interest rates is mitigated by increasing provisions and cost of funds.

We continue to believe the elements of industry dislocation that entered the system in 2015/2016 will have little or no impact on the profitability of the system. We do, however, believe the rest-of-Africa operations may represent an ongoing drain on some banking groups' profitability over the next 12 months.

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