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The SA Daily 01 April 2020

Banks' pre-crisis caution is some comfort

  • The SA banking sector enters the current crisis without an overhang of excessive prior credit lending, per our estimated credit-to-GDP gap. However, COVID-19 poses a massive headwind to financial markets, banks, and the real economy.
  • The SA Reserve Bank and institutions such as Moody’s in its latest SA credit opinion concur that SA banking is suitably capitalised to handle shocks, and with sufficient room for private sector credit support in this time of crisis.
  • By employing the credit-to-GDP ratio, we assess potential banking-sector systemic pressure as it may arise from excessive (historical) credit extension relative to GDP. This indicator has been in decline and also below its long-term trend, per the Hodrick-Prescott filter, despite the modest increase in household credit uptake from H2:18 to end-2019.
  • The credit-to-GDP gap has been negative (see chart below) since 2011 as credit growth either matched or slightly lagged GDP growth. The gap averaged -1.4% from 2011 to 2019. However, during 2008-09, the gap averaged 10.9% as credit grew faster than GDP prior to the global financial crisis (GFC) of 2008/9. Since then, though, SA banks have managed this with caution whilst also building robust capital buffers.

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