The idea that there would be no contagion of local banks as a result of the bailout of African Bank Investment Limited (Abil) was dealt a heavy blow last night when Moody’s Investors Service downgraded by one notch the long-term local currency deposit ratings of the country’s big four banks: Standard Bank, Absa, FirstRand and Nedbank.
In a statement, Moody’s expressed concern about how the Reserve Bank had bailed out Abil by including a bail-in of senior unsecured bondholders and wholesale depositors, which indicated the regulator’s willingness to impose losses, or so-called haircuts, on creditors.
This follows Capitec Bank’s downgrading on Friday by Moody’s, which cited concerns about its exposure to risky unsecured lending.
Moody’s said the four major banks had been downgraded to Baa1 from A3. Their long-term national scale deposit ratings had also been downgraded to Aa3.za from Aa2.za.
“Associated debt ratings of FirstRand and Nedbank, where Moody’s rates their senior unsecured debt, have also been downgraded to Baa1 from A3. All ratings of the above banks and their corresponding long-term foreign currency ratings, as well as those of Investec Bank, were placed on a review for downgrade,” the US-based ratings agency said.
Moody’s said the one-notch downgrade of the local currency deposit and senior unsecured debt ratings reflected its view of the lower likelihood of systemic support from the South African authorities to fully protect creditors in the event of such a need.
The ratings agency said the review for downgrade reflected its concerns regarding weaker economic growth, particularly in the context of consumer affordability pressure and still high consumer indebtedness, which would probably lead to higher credit costs for the banks.
Noting the broad resilience of South African banks in the past, it said it was still concerned about potential asset quality pressure building up in the retail, small, medium and micro enterprises, and the corporate loans segments on the banks’ portfolios.
“To this end, 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.”
Jac Laubscher, an economist at Sanlam, said Moody’s was now taking a completely different view of the South African banking system from the past.
“Agencies express opinions and this one must be evaluated just as such. Other people can have other opinions,” he said.
Standard Bank said the rating actions were linked to Moody’s assessment of the South African banking industry as a whole, and not a reflection of any fundamental changes in the bank’s financial strength, earnings resilience or credit quality.
It said its overall liquidity position remained strong with liquidity buffers amounting to R169.3 billion as of June 30, and it maintained strong Basel 3 capital ratios and these were, as of June 30, 12.2 percent on a tier 1 basis and 15.3 percent on a total capital adequacy basis.
Standard Bank added that it supported the Reserve Bank’s view that the country’s banking sector remained healthy and robust and there had been no indications that other banks had been affected negatively by the specific issues around Abil.