The actions of downgrading the long-term deposit and senior debt ratings of the five largest South African banks follow the weakening of the South African government's credit profile.
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The banks include Standard Bank of South Africa Limited (SBSA), Absa Bank Limited, FirstRand Bank Limited (FirstRand), Nedbank Limited (Nedbank), and Investec Bank Limited (Investec).
These rating actions conclude the rating review initiated for these banks on 19 August 2014.
“The rating actions are driven primarily by the weakening of the South African government's credit profile, as captured by Moody's downgrade of South Africa's bond rating to Baa2 (stable) from Baa1 (negative) on 6 November 2014, “ read Moody’s statement.
“This is combined with the banks' sizable holdings of sovereign debt securities, which links their creditworthiness to that of the national government; and to a lesser extent by the challenges these banks face in view of weaker economic growth in South Africa,.”
Moody’s added that this was particularly in the context of consumer affordability pressures and still-high consumer indebtedness that will likely lead to increased credit risks and higher loan impairments for the banks.
The ratings agency has downgraded the deposit and senior debt ratings to Baa2 from Baa1 for SBSA, Absa Bank, FirstRand, Nedbank and Investec.
This is primarily due to the weakening of the South African government's credit profile, as captured by Moody's recent downgrade of South Africa's government bond rating to Baa2 (stable) from Baa1 (negative).
The banks' high sovereign exposure, mainly in the form of government debt securities they hold as part of their liquid assets requirement, links their credit profile to that of the government.
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Moody’s also said the rating actions took into account the challenges that the banks' financial performance will face because of South Africa's weak economic growth.
“The rating agency expects GDP growth of 1.4 per cent in 2014 from 1.9 per cent in 2013, levels significantly below the historical average of 4.9 per cent during 2004-08.”
These challenging economic conditions, combined with increasing interest rates and high household indebtedness, will lead to elevated credit risks and potentially higher impairments for banks, exerting some modest pressure on their earnings.