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Moody’s downgrades SA’s biggest banks – outlook negative

Moody’s downgrades SA’s biggest banks – outlook negative

Credit ratings agency, Moody’s Investors Service has downgraded the five largest South African banks on Monday from Baa2 to Baa3.

In a statement released on 12 June 2017, Moody’s said it has downgraded the long-term local and foreign currency deposit ratings of Standard Bank, FirstRand, Absa, Nedbank and Investec, following the earlier sovereign rating’s downgrade to Baa3.

“The rating agency has also downgraded Standard Bank Group Limited’s long-term local- and foreign-currency issuer ratings to Ba1 from Baa3, and affirmed all banks’ national scale ratings.” Moody’s stated.

“This rating action concludes the review initiated on 4 April 2017, and follows the weakening of the South African government’s credit profile, as captured by Moody’s similar rating action on the sovereign rating on 9 June 2017. The rating action also takes into account the reduced capacity of the [South African] government to provide support to banks in case of need.”

Moody’s said the weakening credit and macro profile of the South African government exerts pressure on SA banks.

“The primary driver for today’s rating downgrades is the challenging operating environment in South Africa, characterized by a pronounced economic slowdown, and weakening institutional strength that has led Moody’s to lower South Africa’s Macro Profile score to ‘Moderate-‘ from ‘Moderate’. The lower Macro Profile exerts pressure on the individual factors on banks’ scorecards, and implies that the country’s banks need stronger loss-absorption and liquidity buffers to withstand the headwinds and in order to remain at the same rating levels.”

The rating agency expects [SA] GDP growth of only 0.8% in 2017 and 1.5% in 2018, from 0.3% in 2016, levels significantly below the government’s target growth. The banks’ high sovereign exposure, mainly in the form of government debt securities held as part of their liquid assets requirement, links their credit profile to that of the government.

The top five banks’ overall sovereign exposure, including loans to state-related entities, averages more than 150% of their capital bases, according to South African Reserve Bank’s regulatory returns (BA900) as of March 2017.

The negative outlook assigned to all the banks’ ratings is primarily linked to the negative outlook on the sovereign rating, which is itself partly driven by the weak economic environment.

As a consolation, Moody’s said although it expects banks’ financial fundamentals to largely remain robust, the weak economic environment increases the downside risks for the banks’ asset quality and core capital levels. The relatively weak economic growth points to potentially higher impairments for the banks, especially on the retail front, exerting some pressure on their earnings and testing the resilient performance they have demonstrated in recent years. However, Moody’s does not anticipate that the asset quality deterioration will compromise materially banks’ recurring earnings, and expects banks will maintain healthy capital levels.”

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Musa Carter

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