JSE banks index down after Moody's cut

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Moodys REUTERS Moodys.

Johannesburg - South Africa’s banking index slid to a five-week low after Moody’s Investors Service downgraded their local-currency ratings and kept them on review for a further cut following African Bank Investments Ltd’s collapse.

The seven-member FTSE/JSE Africa Banks Index declined 1 percent to 65565.90 points, its lowest intraday level since July 15.

Standard Bank, FirstRand and Barclays Africa fell more than 1 percent while Nedbank dropped 0.7 percent to 231.90 rand at 9:18 a.m. in Johannesburg.

The local-currency deposit ratings of Standard, FirstRand, Nedbank and Absa Bank, a unit of Barclays, were cut one level to Baa1, the third-lowest investment grade, 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 South African Reserve Bank placed African Bank, an unsecured lender, 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.”

 

Under Pressure

 

The Central 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 late 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.

The lenders source most of their funding locally and the downgrade probably won’t have a “material impact on their cost of funding and on their operations,” Jean Pierre Verster, an analyst at 36ONE Asset Management, said by phone from Johannesburg.

“It might have a short-term negative impact on sentiment” with the shares coming under some pressure, he said.

Absa, FirstRand and Nedbank’s senior unsecured debt was also cut one level by Moody’s to Baa1.

 

Wrong Assumptions

 

“The biggest four financial institutions in South Africa represent an entirely different business model to the institution that was recently placed under curatorship,” Razia Khan, head of Africa research at Standard Chartered, said in an e-mailed note yesterday.

“The placing of African Bank under curatorship does not necessarily set a precedent for any new situation that may arise with any other financial situation. To assume this would be wrong.”

Capitec, which is African Bank’s closest competitor, was cut two levels to Ba2 from Baa3, with the potential for further downgrades, Moody’s said August 15.

Moody’s shouldn’t assume the central bank won’t step in to back other financial institutions, the central bank said in a statement at the time.

Standard Bank said by e-mail that the country’s banking industry remains strong and that there is no indication other lenders have been affected negatively by the failure of African Bank.

Absa said the ratings downgrade wasn’t specific to the company and that the country’s banking industry remains healthy. - Bloomberg News



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