(Repeat for additional subscribers)
Feb 28 (The following statement was released by the rating agency)
South African banks are resilient enough to withstand pressure on the rand, which has fallen 17% against the dollar over the last 12 months, Fitch Ratings says. But depreciation is likely to hurt South African banks' asset quality to the extent that it leads to higher interest rates or inflation and lower real wages, which impair the debt service capacity of borrowers.
The banking sector has limited exposure to foreign-currency loans and funding. Currency depreciation on its own is therefore unlikely to lead to rating downgrades. Banks' exposures are predominantly domestic and in rand, despite four of the five major banks pursuing a broader African strategy. Standard Bank Group and Barclays Africa Group have greater geographical reach at the moment, but even so, we estimate non-domestic and foreign currency loans are moderate at between 15% and 20%.
Foreign funding in the sector is low at the domestic bank level. Regulatory filings show that the proportion of foreign-currency funding was below 10% of total liabilities at end-2013 at the five largest banks - Standard Bank, Absa, FirstRand, Nedbank and Investec. Banks are mostly funded by customer deposits, which make up around 70% of total funding. Although there is reliance on deposits from financial corporates, including money market and pension funds, this funding is in turn underpinned by a retail deposit base. Refinancing risks are manageable especially because the closed rand system mitigates potential outflows so there is a deep local bond market and banks hold solid cushions of liquid assets.
Significant direct FX losses are unlikely as a result of rand devaluation because of generally small open positions. By local regulation, banks cannot hold net foreign-currency positions greater than 25% of equity, and banks are typically well below this limit.
However, policy interest rates rose by 50bp in January. Higher interest rates and weaker capital inflows could reduce economic growth; while higher inflation from a weaker rand not matched by wage increases will reduce the affordability of debt repayments which could weaken banks' asset quality. This could reverse the trends in bad debt, which have improved steadily since 2010. That said, a fall in real wages could improve competiveness and profitability, potentially supporting growth.
If the secondary effects of a weaker rand leads to a material weakening of asset quality and long-term earnings, this could put pressure on the standalone credit profiles of major South African banks, especially if capital levels appropriate for the operating environment are not maintained.
This week's budget highlights that the government is seeking to steer a course between fiscal consolidation and supporting the subdued economy. While sluggish growth remains a challenge - the National Treasury revised its 2014 GDP growth forecast in the budget to 2.7% from 3% - we still expect non-performing loan ratios to remain between 3.5% and 5% in the longer term.