South African Banks’ Asset Quality Improves, but Vulnerabilities Persist

South African banks’ earnings have been resilient through the crisis and asset quality indicators improved during 2011, according to Fitch Ratings.  However, the credit ratings agency (CRA) adds in its report that a negative outlook on most banks’ issuer default ratings (IDRs) reflects their vulnerability to an uncertain operating environment.

The report, entitled ‘South African Banks: Peer Review’, expresses Fitch’s view that all the South African banks will be able to comply with the Basel III liquidity coverage ratio, supported by a committed facility from the South African Reserve Bank. However, none of the four major banks will be able to meet the net stable funding ratio requirement in its current form.

“The nonperforming loan [NPL] ratios of all of the South African banks improved during 2011. This was driven by write-offs and recoveries and the slower inflow of new NPLs, supported by sustained low interest rates,” said Denzil De Bie, a director in Fitch’s financial institutions team. “In the longer term, Fitch expects the four major South African banks’ NPL ratios to continue to improve following an apparent stabilising of asset quality in the sector.”

The report highlights some key rating drivers for South Africa’s major banks in the context of their bbb range viability ratings. The CRA considers the Fitch core capital (FCC) ratios of Absa Group, FirstRand Bank, Nedbank Group and Standard Bank Group to be appropriate for the operating environment. Investec Limited’s FCC ratio is lower than that of the four major banks. Fitch added that in light of Investec’s smaller franchise and concentrated property credit risk, it would expect Investec to hold capital in line with or above most peers.

“The maintenance of acceptable levels of FCC is key to the South African banks maintaining their current ratings. Any material reduction in capital adequacy from current levels would put negative pressure on the viability ratings,” added De Bie.

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