Moody's negative on S.African banks outlook

* Credit outlook negative for next 12-18 months

* Banks' profitability may not match pre-credit crunch level

JOHANNESBURG, June 25 (Reuters) - South African banks may not recover to the levels of profitability seen before the credit crisis due to higher funding costs and provisions, ratings agency Moody's said on Thursday.

Moody's said its outlook for the fundamental credit conditions in the banking industry was negative for the next 12 to 18 months as local banks feel the pinch from the deteriorating economic environment.

The top banks have forecast lower earnings, mainly due to mounting bad debts, as consumers default on loans and Africa's biggest economy reels from its first recession in 17 years.

"Following the crisis, we see that the earnings power, the profitability of the South African banks, might not be high as they have been pre the crisis, and that's because a number of costs that they have suffered are here to stay," Moody's Constantinos Kypreos told Reuters.

"The funding cost used to be quite low in the past, now part of that increase in funding costs is here to stay. The same with provisions ... on a sustainable basis, or through a cycle basis, (provisions) are likely to be higher than what you have seen in the past."

South African banks escaped the worst of the credit crunch thanks partly to strict exchange controls, but Kypreos said the global financial crisis, along with rising domestic inflation and a string of interest rate hikes to June 2008, had put pressure on the local banks.

While banks have remained relatively well capitalised, they have had to cushion their balance sheets with higher capital and liquidity buffers to help stem the negative effects of the credit crunch and a depressed local economic environment.

Absa Group Ltd (ASAJ.J) and FirstRand Ltd (FSRJ.J) said on Tuesday earnings would be lower as bad debts continued to rise at their retail and corporate units and the value of their investment portfolios had shrunk. [ID:nLN711962]

Standard Bank (SBKJ.J), Africa's biggest bank by assets, has scaled back its full-year expectations and peer Nedbank (NEDJ.J) told Reuters earlier this month trading conditions remained "very tough".

Kypreos said a rise in job losses due to the slowdown would increase impairments at the banks' retail businesses and said the corporate side, which has not been as hard hit, would also be "contaminated".

South Africa's central bank has cut interest rates by 450 basis points since December but left its repo rate unchanged at 7.5 percent on Thursday. [ID:nLP8453] (Reporting by Serena Chaudhry; editing by Karen Foster)