South African banking system outlook cut to negative

Ratings agency Moody’s has lowered its outlook for the South African banking system to negative from stable, citing worsening operating conditions over the next 18 months.

“The outlook expresses Moody’s expectation of how bank credit worthiness will evolve in this system over the next 12 to 18 months,” the annual banking system outlook said on Friday.

Following the release of the outlook, shares in Barclays Africa were down 2.2 percent as at 13:38 GMT, Standard Bank was down by 1.08 percent and Investec shed 0.5 percent, according to Reuters.

South Africa’s economy is expected to grow below¬†1 percent this year, as it continues to feel the impact of low commodity prices, El-Nino exacerbated drought, as well as “noise” in the political system, which a¬†senior Treasury official said have unnerved investors.

“The challenging economic outlook will strain borrowers’ repayment capacity, fuelling increased asset risks,” Moody’s said.

The ratings agency expects the banking system’s non-performing loan ratio to rise to around 4 percent by the end of 2017 from 3.1 percent in December 2015. This, it said, is due to pressure on corporates and consumers from rising interest rates and inflation.

With demand for credit reducing and business opportunities shrinking, profitability in the sector could also come under strain, according to Moody’s.