Cape Town - Moody’s Investors Service’s decision to downgrade South Africa’s biggest lenders raises the risk that the nation’s sovereign rating may be lowered, Standard Bank said.
“The action on the banking system by Moody’s could move forward a potential negative rating action on the sovereign,” Asher Lipson, head of fixed-income strategy at Johannesburg-based Standard Bank, said in a note to clients today.
Before yesterday’s downgrade, the rating company regarded South Africa’s banking system as a credit strength for the sovereign, he said.
Moody’s yesterday cut the local-currency debt of lenders including Standard Bank and FirstRand, and kept them on review for more reductions after the collapse of African Bank Investments Ltd, the country’s largest provider of unsecured loans.
The company cut South Africa’s sovereign rating one level to Baa1 in September 2012, the third-lowest investment grade, with a negative outlook since November 2011.
That’s two levels higher than Standard & Poor’s and one higher than Fitch Ratings.
The local-currency deposit ratings of Standard Bank, FirstRand, Nedbank and Barclays’s Absa unit were cut one level to Baa1 from A3, Moody’s said yesterday in a statement.
Standard Bank’s issuer rating was lowered to Baa2 from Baa1, while all ratings, including Investec’s, were put on review for downgrade.
The rand slumped 0.4 percent to 10.69 per dollar by 12:35 p.m. in Johannesburg, while the cost to protect against default of the nation’s dollar debt for five years using credit-default swaps climbed four basis points to 180.
The seven-member FTSE/JSE Africa Banks Index declined 2.2 percent to 64,770.56 points, its lowest intraday level since July 10.
The South African Reserve Bank placed African Bank, which also owns a furniture retailer, into administration on August 10 after it reported a record loss and said it needed at least 8.5 billion rand of capital.
The rescue included a 10 percent impairment of African Bank’s senior and wholesale debt, a move that Moody’s said suggested South African authorities won’t fully protect creditors in the case of a bank failure.
The central bank’s response, while helping contain the risk of contagion, “indicates the regulator’s willingness to impose losses on creditors,” Moody’s said.
“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.”
The Reserve Bank, in a statement on its website, said it disagreed with Moody’s decision, reiterating comments it made after the ratings company downgraded Capitec Bank last week.
Moody’s concern that the bank won’t provide systemic support after the African Bank rescue “stands in sharp contrast to the support actually provided by the SARB,” the Pretoria- based regulator said. - Bloomberg News