CAPE TOWN: South African banks are likely to be less profitable next year amid a slow economy and a concomitant increase in bad debts and rising capital costs. However, insurers are likely to profit from the new technology. With about a 1% growth forecast for next year, banks will struggle to find new customers while bad debts will rise as unemployment increases, analysts interviewed by News24 say. “Increased cost of funding and rising impairment charges will collectively cause a profit pinch,’’ Adam Bates, EY Financial Services Africa leader, said. “It is unlikely that banks will move into a loss situation but overall profits are more likely to grow at a slower pace or perhaps even shrink.” Rating agency Moody’s Investors Service last month warned of an increase in problem loans at South Africa’s four biggest banks over the next 18 to 24 months with non-performing loans set to increase to 4% by the end of 2017 from 3.2% in 2016. Debt provisioning will have to increase as economic growth slows, cutting return on asset ratios to 1% from 1.2% at the end of June.
The agency picked FirstRand as the best placed among the country’s four largest banks to weather the upcoming economic slowdown and resultant increase in bad debts. FirstRand and Nedbank are also rated higher for asset quality than Standard Bank and Absa, whose non-performing loans are seen higher at 3.3% and 3.4% respectively. South Africa’s economy barely grew in the third quarter at 0.2%, compared with a revised 3.5% in the third quarter, putting it on track to grow by 0.4% in 2016 and 1.2% next year, according to the Reserve Bank. Against a population growth rate of 1.6%, economists say South Africans are growing poorer on a per capita basis. The country narrowly avoided being downgraded by all three major rating agencies but analysts say the risk of a downgrade to junk remains high unless the government addresses issues that have prevented companies from investing and swelled corporate cash levels on companies listed on the JSE to more than R650 billion ($46.62 billion). The country’s biggest asset managers are struggling with a market that has tended flat in the past 18 to 24 months, Adrian Cloete, portfolio manager at PSG Wealth, said. Flat revenues were also beginning to hurt margins as costs rose against a background of rising outflows because of the weaker economy.
While the major banks will likely avoid losses, smaller banks may struggle to attract new clients and post losses, Bates said. “It is very difficult to find new clients in a low- or no-growth environment so organic growth will be much more difficult to achieve.’’ Nomura International emerging markets economist Peter Attard Montalto said while profit growth would slow as banks struggle to roll over debt–resulting in lower advances–interest rates were unlikely to increase significantly with inflation also moderating. “Banks remain well qualified with limited FX exposure and good provisioning in the tier 1 and tier 2 spaces,’’ Montalto said. “As such I think there are no serious financial stability threats either from the domestic cycle or the global influence from higher US rates.’’ In future, insurers, asset managers and the banks are likely to benefit from the innovation revolution taking place in the financial technology space – which provides distribution platforms, Bates said. “New platforms create a new means of distribution. This is especially true for insurers, who struggle across much of Africa, where the awareness of insurance and its benefits has kept demand very low.’’ New technology will also help insurers handle claims payments and better understand client behavior, which will help them price their products for individuals rather than at market segments.
