The JSE’S banking index slid to a five-week low yesterday as investors pummelled bank shares in the wake of a downgrade of the country’s big four lenders by Moody’s Investors Service on Tuesday.
The agency has warned the lenders of more downgrades if their South African operating environment deteriorates further, especially as consumers grapple with soaring debt repayment costs.
The FTSE/JSE Africa Banks index shed 1.42 percent to close at 65 301.65 points.
Standard Bank, FirstRand and Barclays Africa fell more than 1.3 percent, while Nedbank lost 0.93 percent to R231.30.
The Reserve Bank said yesterday that while it respected the independent opinion of rating agencies, it did not agree with the rationale given in taking this step or with the assessment it was based on.
The Reserve Bank said with a capital adequacy ratio of 14.87 percent, of which tier 1 capital comprised 12.05 percent, a financial leverage multiple of 13.43, impaired advances to gross loans and advances of 3.57 percent and a return on equity of 14.25 percent, the local banking sector remained healthy and robust.
The latest downgrades are a spillover from the collapse of African Bank two weeks ago, a development that has sent regulators scrambling in recent days to reassure the markets.
Standard Bank said in its response to Moody’s action that the country’s banking industry remained strong and there was no indication that other lenders had been affected negatively by the failure of African Bank.
Absa, the local arm of Barclays Africa, said the ratings downgrade was not specific to the company and the banking industry remained healthy.
FirstRand confirmed “that the ratings actions announced [were] linked to Moody’s assessment of the South African banking industry as a whole and is not a reflection of any fundamental changes in FirstRand’s financial strength, earnings resilience or credit quality”.
Researcher Razia Khan at Standard Chartered said: “The biggest four financial institutions in South Africa represent an entirely different business model to the institution that was recently placed under curatorship.
“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.”
Even so, investors sold off the bank shares.
Analyst Peter Attard Montalto at Nomura said: “We view these downgrades as technically justified, but think it is still important to separate downgrades from the health of the banking system and the Reserve Bank’s commitment to financial stability.”
He continued: “Further banking sector downgrades from other agencies are possible, but we do not think this adds to the downward bias on sovereign ratings because of the view on senior bank debt-loss potential given the Reserve Bank’s commitment to financial stability, which we and the ratings agencies do not see as diminished. We think much greater transparency is needed from the regulators on [African Bank’s] technicalities and on banking sector support policies, in particular, to calm the markets. Until then market concerns are likely to continue, though they are still at only moderate levels.”
Standard Bank said: “Moody’s has South Africa’s sovereign rating on a negative outlook, which implies that the… agency sees a significant enough probability of downgrading South Africa. The agency rates South Africa’s long-term foreign currency at Baa1, with the sovereign… on a negative outlook since September 2012. Moody’s has thus been concerned about the South African story for a number of years.”
Azar Jammine, the chief economist at Econometrix, said he believed there was a rejection by Moody’s of the nature of the package used by the Reserve Bank to salvage the African Bank situation.
The local-currency deposit ratings of Standard Bank, FirstRand, Nedbank and Absa were cut one level to Baa1, the third-lowest investment grade, from A3.
The downgrades mean the banks may find it more costly to raise capital. – With additional reporting by Bloomberg