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Moody’s continues to cut bank’s ratings
Moody’s Investors Service (Moody’s) have downgraded the long-term local-currency deposit of South Africa’s four leading banks, keeping them on review for further investigation the collapse of African Bank Investments Ltd (ABL), writes Krysia Gaweda.
South Africa’s four leading banks, Standard Bank of South Africa (SBSA), Absa Bank Limited (Absa), FirstRand Bank Limited (FirstRand), and Nedbank Limited (Nedbank) have been downgraded by one notch, from A3 to Baa1, the third-lowest investment grade.
In addition, the bank’s long-term national scale deposit ratings have also been downgraded from Aa2.za to Aa3.za. Absa, FirstRand, and Nedbank unsecured debt were also downgraded to Baa1 from A3, owing to Moody’s involvement in their senior unsecured debt ratings.
All other ratings of the four banks and their corresponding long-term foreign currency ratings, as well as those of Investec Bank Limited (Investec), were also placed on review for downgrade.
According to Moody’s, the downgrade reflects their view of the “lower likelihood of systemic support from South African authorities to fully protect creditors in the event of need”.
Moody’s opinion was recently provoked by the actions taken by the South African Reserve Bank (SARB) in response to the abrupt loss of creditor confidence in ABL.
SARB placed ABL, an unsecured lender, under curatorship after it had reported a record loss and said it needed 8.5-billion rand of capital. The rescue also included a 10 percent impairment of ABL’s senior and wholesale debt. Moody’s stated this move suggested the South African authorities wouldn’t be able to fully protect creditors in the case of a bank failure.
Moody’s also said the central bank’s response, while helping contain the risk of contagion, “indicates the regulator’s willingness to impose losses on creditors”.
“This needs to be reflected in Moody’s 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.”
According to a statement released by Moody’s, the review for downgrade reflects the ratings agency’s 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 also 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. The rating agency, however, is also concerned about potential asset quality pressure building up in the retail, small and medium enterprise (SME) and corporate loans segment of the banks’ portfolios.
In aim to end this, the review will focus on a forward-looking assessment of banks’ capital, funding and liquidity buffers against risks stemming from the increasingly challenging operating conditions.