[DATA SBK:Standard Bank of South Africa], [DATA ABSP:Absa Bank Limited], [DATA FSR:FirstRand Bank Limited] and [DATA NED:Nedbank Limited] have been downgraded by one notch to Baa1 from A3.
The banks’ long term national scale deposit ratings have also been downgraded to Aa3.za from Aa2.za.
“The one notch downgrade of the local-currency deposit and senior unsecured debt ratings reflects Moody’s view of the lower likelihood of systemic support from South African authorities to fully protect creditors in the event of need,” Moody’s said.
“This updated opinion was prompted, most recently, by the actions taken by the South African Reserve Bank (SARB) in response to the abrupt loss of creditor confidence in [DATA ABL:African Bank Investments Limited] (ABIL).”
(READ MORE: Moody’s downgrades ABIL’s African Bank)
The ratings agency added that this policy response addressed related liquidity and capital issues but that the inclusion of a bail-in of senior unsecured bondholders and wholesale depositors indicates the regulator’s willingness to impose losses on creditors.
“This needs to be reflected in Moody's ratings, as debt ratings speak to both the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default,” said Moody’s.
“Similarly deposit ratings speak to banks’ ability to repay punctually uninsured deposit obligations, including wholesale deposits.”
POSSIBILITY OF A FURTHER DOWNGRADE
Moody’s stated that the rating review for further downgrade reflects its forward-looking concerns that the increasingly challenging economic conditions in South Africa will weigh on the banks’ financial performance.
“Although Moody’s acknowledges the banks’ historically resilient financial performance, the rating agency expects that asset quality metrics and earnings-generating capacity could come under pressure amid increased loan loss provisions for retail and corporate lending,” it said.
“In particular, Moody’s considers that South Africa’s slowing economy, high inflation, labour unrest, still highly leveraged consumers and reduced consumer affordability amid increasing interest rates will continue to pressure borrowers’ loan repayment capabilities.”
In addition to the four banks, Investec Bank’s local-currency and foreign-currency deposit ratings of Baa1/P-2 and its national-scale deposit ratings of Aa3.za/P-1.za have also been placed on review for downgrade.
The agency indicated that the review would focus on a forward-looking assessment of the risk of asset quality deterioration and higher credit costs, the banks’ recurring earnings-generating capacity in light of challenging operating conditions, and negative pressure on their capital levels and funding sources.
WE DO NOT AGREE WITH RATIONALE: SARB
The SARB promptly responded to the announcement by Moody’s stating that it does not agree with the rationale given nor does it agree with the assessment it is based on.
“Once again, Moody’s refers to a lower likelihood of sovereign systemic support based on decisions taken recently in relation to African Bank Limited. This concern stands in sharp contrast to the support actually provided by the SARB,” it said.
(READ MORE: Reserve bank disputes Moody’s downgrade of Capitec)
“Notwithstanding this downgrade, Moody’s has confirmed the resilience of the South African banking system. With a capital adequacy of 14.87 per cent, impaired advances to gross loans and advances of 3.57 per cent and a return on equity of 14.25 per cent, the South African banking sector remains healthy and robust.”
FIRSTRAND BANK’S (FRB) REACTION TO DOWNGRADE
In response to the announcement, FirstRand Bank said that the rating action brings its local currency deposit and debt ratings in line with its Baa1 foreign currency deposit rating, its standalone credit assessment of baa1 and the Baa1 bond rating ascribed to the South African government by Moody’s.
“FRB confirms that the rating actions announced today are linked to Moody’s assessment of the South African banking industry as a whole and is not a reflection of any fundamental changes in FRB's financial strength, earnings resilience or credit quality,” it said.
“FRB supports the SARB’s view that South Africa’s banking sector remains healthy and robust, and there have been no indications that other South African banks have been affected negatively by the specific issues around African Bank.”