S&P downgrades SA banks to junk status

Banks cannot be rated higher than the country's foreign currency sovereign credit rating

S&P downgrades SA banks to junk status

6 April 2017

Cape Town – Rating agency Standard & Poor’s (S&P) has downgraded South Africa’s banks to non-investment grade (BB+) to fall in line with its rating of the country.

Nedbank, Absa, Investec and FirstRand were downgrade by S&P after markets closed in South Africa on Wednesday, the rating agency website shows.

However, Nedbank said “SA bank ratings, including Nedbank’s, were placed under ratings review by Moody’s and lowered in line with the sovereign rating by Standard & Poor’s”.

It said banks cannot be rated higher than the country's foreign currency sovereign credit rating, which it downgraded to junk status last Thursday.

"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," S&P said in a statement on Wednesday.

“SA banks' ratings are constrained by the SA sovereign credit rating and any changes to the SA sovereign credit ratings are automatically reflected in the credit ratings of SA banks,” Nedbank said in a statement on Thursday.

The ratings actions reflect S&P’s assessment of the SA sovereign and banking industry as a whole and are not specific on any bank.

“The lowering of the ratings on South Africa reflects our view that political and institutional stability in the country has weakened,” S&P said in a statement regarding Nedbank.

“Amid slow economic growth and political wrangling, the South African banks have been performing resiliently, however.”

S&P said the negative outlook on Nedbank reflects that on the sovereign.

“We would lower the ratings on the bank or revise the outlook to stable should there be a similar action on the sovereign.

“Outside a sovereign action, we see positive or negative rating actions on the bank as a remote possibility in the next 12 months.”

Nedbank CEO Mike Brown said that “despite the downgrade, we must remember that Nedbank is operating in a South African banking system that is sound and well-capitalised”.

“When we announced our financial results in February 2017, our results showed that Nedbank is in very good shape and we are well prepared to deal with the volatility that a sovereign downgrade to sub-investment grade brings.

“We have strong capital and liquidity levels and our plans for 2017 are in place and include robust stress testing. This means that we have the strategies, people and balance sheet strength to work our way through the difficult environment in South Africa.”

South Africa’s six-member bank index has declined by over 10% since President Jacob Zuma removed Pravin Gordhan as Finance minister last week.

South Africa’s banks have since the ousting of Pravin Gordhan and his deputy Mcebisi Jonas lost R61bn, as of Tuesday.

S&P said the more pronounced downgrades of the nonoperating holding companies of Barclays Africa and FirstRand reflect its view of the increasing risk of structural subordination following the downgrade of the operating bank entities to speculative grade.

"As a result of this, combined with the respective downgrades of the operating entities, we lowered our  national scale ratings on the nonoperating holding companies by five notches, in line with our mapping  criteria."