The South African Interest-bearing (“SAIB”) fund market amounted to ZAR793.5 bln (c. USD52 bln) at September 30th 2020, making it by far the largest on the African continent. Reflecting the relative safety and stability of the fund type, alongside the uncertain economic environment, interest bearing funds have been a significant outperformer versus the other domestic fund types in South Africa.
Based on the recent interim results, key credit metrics are, so far, broadly in line with GCR’s expectations for the top tier South African banks. GCR projected credit costs to rise to 200bps by the end of 2020, while 70-80% downward stress was applied to forward looking earnings.
The onset of the Covid-19 pandemic has compounded an already strained operating environment and will have a negative impact on asset quality for the banking sector.Unprecedented interest rate cuts by the reserve bank, together with higher credit losses and lower transaction volumes, will weaken profitability and potentially moderate strong capital buffers.
GCR takes three African banking hubs, from the South, East and West of the continent and provides an opinion on how the banking sectors will cope with this potential ‘annus horribilis’.
• We expect the Kenyan economy to outperform South Africa and Nigeria in 2020 and 2021, however, the banking sector has significant asset quality issues and could face significant stress in the lower tiers of the sector.
• The South African Banking system is the most stable, benefiting from lower credit losses and FX risks versus continental peers, but the economy is expected to be weak for some time.
• The Nigerian banking sector performance and economic recovery will be weak as they are both largely linked to the oil price and stability of the Naira.