Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) of five South African banks to ‘BB+’ from ‘BBB-‘. The banks affected are Absa Bank Limited, FirstRand Bank Limited (FRB), Investec Bank Limited (IBL), Nedbank Limited (Nedbank) and Standard Bank of South Africa (SBSA). Fitch has also downgraded the Long-Term IDRs of four bank holding companies – Barclays Africa Group Limited (BAGL), Investec Limited (IL), Nedbank Group Limited (NedGroup) and Standard Bank Group Limited (SBG) to ‘BB+’ from ‘BBB-‘. All entities’ Short-Term IDRs have been downgraded to ‘B’ from ‘F3’.
At the same time, Fitch has downgraded the Support Rating (SR) of the government-owned Development Bank of Southern Africa (DBSA) to ‘3’, from ‘2’, while affirming its National Long-Term Rating at ‘AA+(zaf)’ with a Stable Outlook.
The downgrades result from South Africa’s sovereign Long-Term Foreign- and Local-Currency IDRs to ‘BB+’ from ‘BBB-‘ (see ‘Fitch Downgrades South Africa to ‘BB+’; Outlook Stable’, dated 7 April 2017 at www.fitchratings.com).
The Outlooks on all banks’ Long-Term IDRs are Stable, in line with the Outlooks on the sovereign’s Long-Term IDRs.
A full list of rating actions is in the rating action report above.
KEY RATING DRIVERS
IDRs and VRs
The IDRs of the commercial banks (and their holding companies) are driven by their standalone creditworthiness, as defined by their respective Viability Ratings (VRs). The VRs have been downgraded to ‘bb+’ from ‘bbb-‘, because of the banks’ high exposures to sovereign risk, through large holdings of government securities, exposure to sovereign-owned enterprises and to the weakening operating environment.
All banks have strong franchises, sound management and governance, and solid financial metrics, which keep their VRs at the level of the sovereign’s Long-Term IDRs. However, their VRs are capped at the level of the sovereign’s IDRs because the majority of the banking groups’ operations are in South Africa and they have high exposure to domestic sovereign debt relative to capital.
The deterioration in sovereign creditworthiness brings increased risks to the banking sector. Higher borrowing costs for the sovereign will translate into further pressure on economic growth, which is likely to result in deterioration of banks’ financial metrics, in particular, asset quality, funding and liquidity, which is likely to have a knock-on effect on profitability and capital. Banks will have to build higher capital buffers to meet elevated risk in their operating environment to maintain their VRs.
SUPPORT RATINGS AND SUPPORT RATING FLOORS
The SRs and Support Rating Floors (SRFs) of Absa, FRB, IBL, Nedbank and SBG have been affirmed at ‘3’ and ‘BB-‘, respectively, which reflects a moderate probability of support from the South African authorities if needed. This considers some compression between the sovereign rating and the SRF of domestic systemically important banks (D-SIBs) as the ratings move down the scale.
We consider all five banks to be D-SIBs, but all SRFs are two notches from the sovereign rating, which reflects the proposed enactment of resolution legislation in South Africa to recapitalise a failing bank, which would make it more likely that senior creditors would be “bailed in”. Fitch continues to factor in a moderate degree of sovereign support propensity, as we believe that the South African authorities are likely to retain the flexibility to provide extraordinary support in the interest of financial stability.
NedGroup’s and BAGL’s SRs of ‘4’ reflect a limited probability of support from the institutions’ respective parents, Old Mutual Plc (BBB+/Stable) and Barclays Plc (A/Stable). The SRs of both bank holding companies reflect the ultimate parents’ good ability, but limited willingness, to support. The latter reflects the proposed sale of BAGL by Barclays and the separation of Nedbank from Old Mutual. It also reflects Fitch’s expectation that the parents will continue to support the groups until completion of the respective sale and separation processes.
The SRs and SRFs of IL and SBG are affirmed at ‘5’ and ‘No Floor’, respectively, as Fitch believes that support from the authorities would not extend to holding companies.
The SR of DBSA is downgraded to ‘3’ from ‘2’, reflecting the weaker ability of the South African authorities to provide support to the bank. Fitch believes that the authorities’ propensity to support DBSA continues to be high. This considers its status as a development finance institution, with a clear mandate, incorporated by an Act of Parliament.
National Ratings reflect the creditworthiness of an issuer relative to the best credit and other entities in South Africa. The National Ratings of all commercial banks and their respective holding companies and DBSA have been affirmed as their creditworthiness relative to that of the sovereign and other rated entities has not changed.
DBSA’s National Long-Term Rating reflects a moderate probability of support from the South African authorities, if required. At ‘AA+(zaf)’ it reflects slightly lower perceived creditworthiness relative to the South African sovereign.
SENIOR DEBT, SUBORDINATED DEBT AND HYBRID SECURITIES
The senior unsecured debt program ratings of Absa, FRB, IBL, Nedbank and SBSA are equalised with the respective issuers’ IDRs. Senior debt issued under these programs by FRB, IBL and Nedbank is also equalised with the respective issuers’ IDRs. Therefore all Long- and Short-Term ratings for these programs and issues have been downgraded to ‘BB+’.
The National Long-Term senior unsecured debt program ratings of Absa, BAGL and FRB are equalised with the respective issuers’ National Long-Term Ratings. Senior debt issued under these programs by FRB is also equalised with its IDRs. Therefore all Long- and Short-Term ratings for these programs and issues have been affirmed.
The Long-Term ratings of subordinated debt issued by FRB and Nedbank are one notch below their respective VRs to reflect higher loss severity relative to senior debt. These issue ratings have therefore been downgraded to ‘BB’.
The National Long-Term ratings of subordinated debt issued by BAGL, FRB and IBL are one notch below their respective National Long-Term Ratings, also to reflect higher loss severity relative to senior debt. Therefore these issue ratings have been affirmed. The National Long-Term ratings of two legacy upper Tier 2 notes issued by FRB are notched three times from the bank’s National Long-Term rating to reflect higher loss severity and non-performance risk. This issue rating has been affirmed.
IDRS and VRs
All commercial banks’ IDRs are sensitive to a change in their respective VRs. An upgrade of the banks’ VRs is only possible if the sovereign rating is upgraded. A further downgrade of the sovereign rating would result in a corresponding downgrade of the banks’ VRs and Long-Term IDRs.
In addition, all banks’ Long-Term IDRs are sensitive to further weakening in their operating environment. This would most likely manifest in sharper than expected deterioration in asset quality that significantly affected earnings and capitalisation. In our view, given the increasing risks in the operating environment, banks require stronger capital bases and liquidity buffers to mitigate these risks. Therefore the banks’ IDRs could be downgraded if their capital and liquidity buffers are not increased to meet elevated risks in the operating environment.
All the banks’ Long-Term IDRs are also sensitive to a tightening of liquidity, which could result from capital outflows and more limited access to wholesale funding. However, this is not Fitch’s base case given banks’ limited reliance on foreign wholesale funding and expectations of limited capital outflows from domestic investors.
SUPPORT RATING AND SUPPORT RATING FLOOR
The SRs and SRFs of Absa, FRB, Investec, Nedbank and SBSA are sensitive to a change in the willingness and ability of the authorities to support the banks. A further downgrade of the sovereign rating could result in a downgrade and downward revision of the banks’ SRs and SRFs respectively. Fitch’s view of a weaker propensity to support the banks is most likely to be triggered by clear statements of commitment to use resolution framework to resolve troubled banks in all scenarios.
The SRs and SRFs of BAGL and NedGroup are sensitive to the completion of a significant part of the respective sale and separation processes by their parents, Barclays and Old Mutual, or clear statements from the parents that they will not provide extraordinary support, if required, during these processes.
As holding companies, there is no upside for IL’s and SBG’s SR and SRF over the rating horizon.
DBSA’s Support Rating of ‘3’ could withstand a further sovereign downgrade of up to two notches, indicative of further weakening in the ability of the authorities to support the bank.
A change in National Long-Term Ratings would stem only from a change in the respective banks’ creditworthiness relative to the sovereign or other South African entities.
For DBSA, this would be most likely to result from a change in Fitch’s perception of the South African authorities’ willingness to provide support if required. This could include public statements or actions indicating a decreased willingness to support. Conversely, an increased willingness to support could come from explicit, formalised support such as guarantees or increased callable capital. The ratings are also sensitive to strategic or corporate governance failings, which could undermine the bank’s public mission.
SENIOR DEBT, SUBORDINATED DEBT AND HYBRID SECURITIES
The senior unsecured program ratings of Absa, FRB, IBL, Nedbank and SBSA and senior debt issued under these programs by FRB, IBL and Nedbank are sensitive to a change in the banks’ respective IDRs.
The National Long-Term senior unsecured program ratings of Absa, BAGL and FRB and senior debt issued by FRB are sensitive to a change in the banks’ respective National Long- Term Ratings.
The Long-Term ratings of subordinated debt issued by FRB and Nedbank are sensitive to a change in the banks’ respective VRs.
The National Long-Term ratings of subordinated debt issued by BAGL, FRB and IBL and FRB’s legacy upper Tier 2 notes are sensitive to a change in the banks’ respective National Long-Term Ratings.
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