Credit losses at South African banks increased in 2020 but the risks are manageable and lenders are expected to recover to pre-pandemic levels after 2022, S&P Global Ratings analysts said during a webinar.
Banks' credit ratings continue to be constrained by the BB- sovereign rating. Ratings said in the webinar that South Africa's outlook is stable, largely owing to the country's "credible central bank, its flexible exchange rate, an actively traded currency and deep capital markets."
South Africa imposed one of the strictest lockdowns in the world at the start of the COVID-19 pandemic last year, and banks increased provisioning as nonperforming loans and credit losses rose at Standard Bank Group Ltd., FirstRand Ltd., Absa Group Ltd. and Nedbank Group Ltd. The aggregate NPL ratio for the "big four" South African banks increased to 6% as of Dec. 30, 2020, from 4% in 2019, analysts said during the July 7 webinar.
Credit losses also increased "substantially" compared to peers such as Russia and Morocco, with credit losses at South African banks rising to 2.1% in 2020 from 0.7% in 2019, according to a recent commentary from Ratings. Credit losses refer to additional provisions as a proportion of customer loans. Generally these impairments include direct write-offs of loans.
Ratings analysts expect credit losses to start decreasing to reach 1.7% in 2021 and 1.3% in 2022 and should recover closer to pre-pandemic levels after 2022.
The South African banking sector took a hit to earnings last year due to the economic impact of the pandemic. But the pressure on earnings is in line with peers such as Brazil and Thailand, the analysts said.
Top-tier South African banks have "strong" capital levels and Ratings expects earnings to gradually recover from 2021 onward, but return on equity will only reach pre-pandemic levels in 2022.
The big four are unlikely to make use of their conservation buffer due to resilient earnings and expect most of these buffers to be reinstated in 2022, Ratings said.