Moody’s downgrades four South African banks after collapse

The credit ratings agency said on 19 August that it had downgraded by one notch the long term local-currency deposit ratings of the Standard Bank of South Africa, Absa Bank Limited, FirstRand Bank Limited and Nedbank Limited to Baa1 from A3.

Moody’s said the banks' long term national scale deposit ratings have also been downgraded to Aa3.za from Aa2.za. In the case of Absa, FirstRand and Nedbank, where the agency rates their senior unsecured debt, associated debt ratings have also been downgraded to Baa1 from A3. All ratings of the banks and their corresponding long term foreign-currency ratings, as well as those of Investec Bank Limited, were placed on review for downgrade, the agency said.

Moody’s said the move reflected its view “of the lower likelihood of systemic support from South African authorities to fully protect creditors in the event of need”. The action was prompted “by the actions taken by the South African Reserve Bank (SARB) in response to the abrupt loss of creditor confidence” in ABL.

The SARB said it respected the independent opinion of rating agencies, but did not “agree with the rationale given in taking this step, nor do we agree with the assessment it is based on”.

The SARB said: “Once again, Moody’s refers to a lower likelihood of sovereign systemic support based on decisions taken recently in relation to ABL. This concern stands in sharp contrast to the support actually provided by the SARB. Notwithstanding this downgrade Moody’s has confirmed the resilience of the South African banking system.”

The SARB announced on 10 August that ABL was being placed under curatorship and unveiled plans to recapitalise the bank, by raising 10 billion rand (ZAR) ($935 million) underwritten by a consortium made up of the country's leading banks and the Public Investment Corporation. ABL said the curatorship did not apply to the bank’s parent company, African Bank Investments Limited.

According to Moody’s, the SARB “addressed related liquidity and capital issues, thereby mitigating contagion risks, with the further objective of minimising potential losses”. However, Moody’s said “the inclusion of a bail-in of senior unsecured bondholders and wholesale depositors indicates the regulator's willingness to impose losses on creditors”. Moody’s said this needed to be reflected in its ratings as “debt ratings speak to both the likelihood of a default on contractually-promised payments and the expected financial loss suffered in the event of default... similarly, deposit ratings speak to banks' ability to repay punctually uninsured deposit obligations, including wholesale deposits”.

Moody’s said the review for downgrade reflected its concerns regarding weaker economic growth, “particularly in the context of consumer affordability pressures and still high consumer indebtedness that are likely to lead to higher credit costs for the banks”.

Moody's said it noted the “broad resilience” demonstrated by South African banks in the past, “including the management of adverse economic environments and recognises the solidity of key system financial metrics”.

However, the agency said it was also concerned about “potential asset quality pressure building up in the retail, small and medium enterprise and corporate loans segment of the banks' portfolios”. In view of this, Moody’s said its review will focus on a forward-looking assessment of banks' capital, funding and liquidity buffers “against risks stemming from the increasingly challenging operating conditions”.

As an additional measure, Moody's also downgraded the long-term issuer rating of Standard Bank Group to Baa2 from Baa1, with the ratings on review for further downgrade. “SBG's issuer rating is positioned one notch lower than the local currency deposit rating of its fully-owned main banking subsidiary SBSA, reflecting the structural subordination of SBG's creditors to those of SBSA,” Moody’s said.