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Banks shrug off Moody’s downgrade

The big four local banks shrugged off yesterday’s announcement by rating agency Moody’s Investors Service that it was cutting the outlook for South Africa’s banking system to negative from stable with the share prices of Absa, Nedbank, Standard Bank and FirstRand closing marginally firmer on the day.

Banking analysts said yesterday that the changed outlook was in line with expectations and tracked the September downgrades of South African government debt by Moody’s and Standard & Poor’s.

“The local banking industry remains very healthy and this move merely reflects the country risk and the fact that South African banks have a lot of government debt on their balance sheets,” said Johann Scholtz of Afrifocus Securities.

He added that he believed the local banks remained very healthy. “They are probably much healthier than they were 18 months ago in terms of asset quality and credit risk,” he said.

Anchor Capital’s Peter Armitage said that while it was easy to be flippant about the rating agencies in the aftermath of their involvement in the 2008 financial global crisis “their decisions can affect the cost of funds so you have to care”.

But Armitage added: “In the context of almost everyone else in the world being downgraded, relatively speaking South African banks are in a good position.”

Yesterday, Moody’s said that the change from stable to negative reflected its expectations that weakening macroeconomic conditions, including downside risks related to the broader global environment, would elevate credit risks and pressure banks’ asset quality and profitability metrics.

Moody’s made specific reference to the banks’ exposure to the property market. In addition it noted that the sizeable holdings of government debt exposed the banks to the government’s creditworthiness, which was under pressure “from fiscal and economic headwinds”.

Moody’s said a further consideration was the banks’ increasing reliance on short-term wholesale deposits, which underpinned “structural funding challenges that will be exacerbated by Basel 3’s funding requirements”.

Moody’s did make reference to the banks’ “resilient core earnings generating capacity” and expectations that banks’ capital buffers would be maintained ahead of the implementation of Basel 3.

The banks are expected to sustain good levels of bottom-line profit, however Moody’s expects profitability ratios such as return on equity to come under pressure.

Mike Brown, Nedbank’s chief executive, said Moody’s announcement was not a surprise “but disappointing given the stand-alone strength of banks. South Africa undoubtedly has one of the best regulated, best capitalised and most stable banking systems of any country in the world – as the recent number two rating on ‘soundness of banks’ by the World Economic Forum Global Competitiveness Report highlights.”

He said Nedbank had reported a 25 percent increase in headline earnings to June. “The group has continued to strengthen all aspects of its balance sheet and is well-positioned to weather a tough economic environment.”

A spokesperson for FirstRand said that Moody’s announcement was not unexpected, adding that FirstRand “does not envisage any impact on our funding, capital and liquidity – now or following the implementation of Basel 3. Credit quality is tracking in line with our expectations.” Standard Bank said it would not comment. Absa was not available.

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