The Capricorn Group has raised red ?ags on the banking sector outlook as it projects a challenging operating environment in the short to medium term induced by the contracting economy.
The group’s ?nancial results also ?ngered out a drop in GDP numbers as having had impacted its operations despite a solid performance. However, the outlook for the sector remains un?attering. The group notes that improved liquidity should aid the banking sector’s interest margin through a reduction in the cost of funding.
At the same time, Private Sector Credit Extension (PSCE) has slowed down driven by both demand and supply factors, with challenging liquidity conditions, slowing household income growth and a tempering of the request being the key drivers of the slowdown. “Changes to regulation around the loan-to-value requirements for mortgage loans, and changes to the deposit requirements and maximum tenor for instalment credit, both designed to safeguard consumers, resulted in a further slowdown in credit issuance,” says the group.
Pressed on how this reduction will hit the consumer, Capricorn Group says it will most likely have an adverse impact as the interest earning assets reprise quicker than interest bearing liabilities. The banking sector’s fate is not however entirely tied to the neck of the economy; the group says opining that if the liquidity position remains healthy, the sector should outperform the economy.
Meanwhile Head of Research at PSG Eloise du Plessis has said, “Firstly, I think we have to realise that the banks have still shown strong pro?ts even during this period of economic downturn. There might not have been the 20% - 25% increase in pro?ts we had become accustomed to over the last ?ve years.” On the banking sector outlook, she says, “This situation of weak growth might continue for another 12 months. The expected improvement in the overall GDP number, primarily driven by mining and agriculture coming from a small base, masks pressure in the underlying industries.”
The analyst reinforced her pessimism about the sector’s prospects of growth in the short to medium term as “Wholesale and retail trade and construction, two parts of the economy which create many jobs, are not expected to recover just yet.” The low oil price will keep the local Angolan tourists and property investors away for a while longer who have been big drivers of retail trade and property growth, she adds.