Johannesburg - South Africa’s banks, already battling slowing profit growth amid sluggish economic expansion, now face declining returns and rising bad debts after S&P Global Ratings cut the sovereign’s credit rating to junk.

Some 18 hours after the downgrade, the JSE banking index was trading 0.2% lower, having lost already 10% the previous week. 

“This is bad for banks’ net return on assets and return on equity, not just via lower performance on existing assets, but also via a higher incidence of non-performing loans,” Adrian Saville, chief strategist at Citadel Wealth Management, said in emailed comments on Tuesday. “The real issue is the impact on economic growth, industrial performance and employment. There is an unambiguous negative relationship between economic growth and bank assets.”

S&P cut South Africa’s foreign-currency debt to junk status on Monday night, just two trading days after President Jacob Zuma fired Finance Minister Pravin Gordhan to replace him with former home affairs minister Malusi Gigaba, a rookie when it comes to finance and business. While South Africa had an investment grade rating for 17 years, S&P said its downgrade was in response to Zuma’s Cabinet purge. Moody’s Investors Service said on Monday its ratings were on review.

South Africa cut to junk first time since 2000 after Zuma purge

Short-term volatility in bank stocks is expected, Nedbank CEO Mike Brown said by email. “Our cost of capital and certain borrowing costs, mainly in debt-capital markets, will increase, meaning we will charge more for our loans. As consumer finances come under more pressure, affordability will naturally decline, even if lending criteria stays the same.”

South Africa’s six-member banks index, which includes Standard Bank and Barclays Africa Group, has plummeted markedly since Gordhan was axed, making it the country’s worst-performing stocks gauge this year.