Moody's Investors Service, ("Moody's") has yesterday downgraded to Baa3 (negative outlook) from Baa2 (Rating Under Review outlook), the long-term local- and foreign-currency deposit ratings of the five largest South African banks: The Standard Bank of South Africa Limited, FirstRand Bank Limited, Absa Bank Limited, Nedbank Limited, and Investec Bank Ltd.. 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. A full list of the banks' ratings affected by today's rating action is at the end of this press release.
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. For further information, refer to the sovereign press release (https://www.moodys.com/research/--PR_367769). The rating action also takes into account the reduced capacity of the government to provide support to banks in case of need.
RATINGS RATIONALE
WEAKENING CREDIT AND MACRO PROFILE OF THE SOUTH AFRICAN GOVERNMENT EXERTS PRESSURE ON 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 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. These challenging economic conditions, combined with potentially weaker investor confidence, volatility in asset prices, and higher funding costs will likely pressure banks' earnings and asset quality metrics going forward, and challenge their resilient financial performance so far.
In addition, 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 (SARB) regulatory returns (BA900) as of March 2017. In view of the correlation between sovereign and bank credit risk, these banks' standalone credit profile and ratings are constrained by the rating of the government. As a result, the baseline credit assessments (BCA) assigned to The Standard Bank of South Africa Limited, FirstRand Bank Limited, Nedbank Limited, and Investec Bank Ltd have been downgraded to baa3 from baa2, while the BCA of baa3 for Absa Bank Limited has been affirmed, already capturing the downside risks emanating from its sovereign exposure.
IMPACT OF GOVERNMENT SUPPORT ON ABSA BANK LIMITED'S DEPOSIT RATINGS
Today's rating action also reflects the weaker capacity of the government to provide support to banks, in case of need. Specifically, Absa Bank Limited's deposit rating previously benefitted from a one-notch government support uplift, which was removed, given the downgrade of the sovereign that indicates the government's reduced capacity to provide support despite the bank's systemic importance. As a result, the rating agency has aligned its government support assumptions for all five commercial banks, resulting in no rating uplift from their corresponding BCAs and positioning their deposit ratings at par with the government's Baa3 bond rating.
NEGATIVE OUTLOOK REFLECTS SOVEREIGN OUTLOOK AND CHALLENGES AHEAD
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. The weakening credit quality of sovereign bonds weighs on the banks' own creditworthiness given their large holdings of government securities.
Likewise, although Moody's 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.
AFFIRMATION OF NATIONAL SCALE RATINGS
According to Moody's, the decision to affirm the banks' national scale ratings (NSRs) follows the recalibration of South Africa's NSR mappings, triggered by the downgrade of South Africa's government bond rating. Moody's NSRs are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. Although the fundamental creditworthiness of the five largest South African banks has deteriorated, their relative credit positioning within South Africa has not materially changed, hence the decision to affirm the NSRs outlined towards the end of this press release.
