Rising interest rates could hurt SA’s banks

Johannesburg – If inflation moves out of the South African Reserve Bank’s target band of 3 to 6 percent, this would pose a threat to banks’ unsecured or instalment finance books, warns Standard & Poor’s.

The rating’s agency in a recent report, Negatives tip the scale for EMEA’s emerging banking systems In 2016, says this is because banks’ unsecured or instalment finance books are often at fixed rates and borrowers tend to be rather inflation sensitive.

“A ratio of debt service to disposable income greater than 10 percent – 11 percent could cause credit losses across the sector to increase markedly.”

The rating agency also notes that overall, South African banks’ performance has been fairly resilient.

“Profitability has improved moderately, and we expect this will continue in 2016. In our view, a latent risk for banks stems from residential mortgage loans, which are exposed to a spike in interest rates.

“A sudden interest rate increase of more than 150-200 basis points, depending on its timing, could result in asset quality problems.”

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In addition, slower economic growth, the increasing threat of higher inflation, drought, and the weaker South African rand are heightening the risk that households’ real income will not stay in step with their debt-servicing capacity.

Despite these risks, S&P’s notes banks’ dependence on external debt remains limited, protecting them from the effect of the rand’s depreciation and risks related to changes in the Fed’s monetary policy.

On a positive note, the corporate sector’s performance was largely sound in 2015, which should support banks’ asset quality, says the agency.

This is although business confidence reached its lowest level in 10 years, due to weak economic growth prospects, uncertain political leadership, unreliable electricity supply, drought, and economic slowdown in China, the country’s major trading partner.

Overall, says S&P, 2016 will be a “testing year for emerging banking systems in Europe, the Middle East, and Africa (EMEA)”.