On April 3, 2017, S&P Global Ratings lowered its foreign currency ratings on South Africa to ‘BB+/B’ from ‘BBB-/A-3’. The outlook is negative. We also lowered our national scale rating on South Africa to ‘zaAA-‘ from ‘zaAAA’.

• We do not rate financial institutions in South Africa above the foreign currency sovereign ratings, due to the direct and indirect impact that a sovereign distress would have on banks’ operations.

• As a result, we are lowering our ratings on FirstRand Bank Ltd., FirstRand Ltd., Nedbank Ltd., Investec Bank Ltd., Absa Bank Ltd., Barclays Africa Group Ltd., and BNP Paribas Personal Finance South Africa Ltd. (BNPPPF), and our rating on the domestic medium-term note program issued by BNP Paribas (acting through its local branch).

• The negative outlooks on the first four entities reflect that on the sovereign and indicate that we could lower the ratings further if we lower our foreign currency ratings on South Africa.

• The other three entities and the note program carry national scale ratings only, to which we do not assign outlooks.

S&P Global Ratings said today that it has lowered its ratings on five South Africa-based financial institutions and two related holding companies, as well as its national scale rating on the domestic medium-term note (MTN) program issued by BNP Paribas through its local branch.

More specifically, we lowered, to ‘BB+/B’ from ‘BBB-/A-3’, our long- and short-term counterparty credit ratings on FirstRand Bank Ltd., Nedbank Ltd., and Investec Bank Ltd. In addition, we lowered our long-term counterparty credit rating on FirstRand Ltd. to ‘BB-‘ from ‘BB+’, while affirming the ‘B’ short-term counterparty credit rating. The outlooks are negative.

At the same time, we lowered our long-term South Africa national scale ratings on FirstRand Bank, Nedbank, Investec Bank, and BNP Paribas Personal Finance South Africa Ltd. (BNPPPF) to ‘zaA’ from ‘zaAA-‘. We affirmed our ‘zaA-1’ short-term national scale ratings on the four entities.

We have lowered to ‘zaBB+/zaB’ from ‘zaA/zaA-2’ our long- and short-term national scale ratings on Barclays Africa Group Ltd. and FirstRand Ltd., the nonoperating holding companies (NOHCs) of their respective financial services groups.

We also lowered our long-term national scale ratings on Barclays Africa Group’s subsidiary, Absa Bank Ltd., to ‘zaA’ from ‘zaAA-‘, while affirming our ‘zaA-1’ short-term national scale rating.

Lastly, we lowered to ‘zaA’ from ‘zaAA-‘ our long-term national scale rating on the South African rand (ZAR) 10 billion MTN program issued by BNP Paribas (acting through its local branch). We affirmed our ‘zaA-1’ short-term national scale rating on the program.

The rating actions follow the lowering of our foreign and local currency sovereign credit ratings on South Africa (see “South Africa Long-Term Foreign Currency Rating Cut To ‘BB+’ On Political And Institutional Uncertainty;
Outlook Negative,” published April 3, 2017, on RatingsDirect).

We lowered our ratings on the financial institutions because we do not rate South African banks above the foreign currency sovereign credit ratings. This is because of the likely direct and indirect influence of sovereign distress on domestic banks’ operations, including their ability to service foreign currency obligations. The more pronounced downgrades of the NOHCs of the Barclays Africa Group and FirstRand Group reflect our view of the increasing risk of structural subordination following the downgrade of the operating bank entities to speculative grade (below ‘BBB-‘). As a result of this,combined with the respective downgrades of the operating entities, we lowered our national scale ratings on the NOHCs by five notches, in line with our mapping
criteria.

The national scale ratings on the ZAR10 billion domestic MTN program are supported by the global scale ratings on BNP Paribas, but constrained by the foreign currency sovereign credit ratings on South Africa. The lowering of the ratings on South Africa reflects our view that political and institutional stability in the country has weakened. However, amid slow economic growth and political turbulence, South African banks have been
performing resiliently.

The sector’s average return on assets improved to 1.3% in 2016 from 1.1% the previous year, while total capital adequacy increased to 15.7% from 14.2%. We anticipate that credit losses for the top-tier banks will
stabilize at 0.8%-1.0% in 2017. However, if decreasing investor confidence materially damages the local currency, sparking rising inflation and interest rates, banks’ credit losses could accelerate toward the year’s end, due to the over-leveraged South African households and pressure on their disposable income to service their debt. Accordingly, this could erode the top-tier banks’ profitability, resulting in lower returns on equity in 2017 than the currently anticipated 15%-19%.

The negative outlooks on FirstRand Bank, FirstRand Ltd., Investec Bank, and Nedbank reflect that on the sovereign. We would lower our ratings on these entities or revise the outlooks to stable should there be a similar action on
the sovereign. Outside a sovereign action, we see positive or negative rating actions on these four banks as a remote possibility in the next 12 months, unless there is significant deterioration of the economy, due for example to weaker investor confidence.

Our national scale ratings have no outlooks but, for financial institutions in
South Africa, are exposed to changes in the ratings on the sovereign and the
economic environment.