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Johannesburg - Fitch Ratings says in a newly-published special report that South African banks' ratings are highly correlated with their operating environment.

All five of the major South African banks' Viability Ratings (VR) were downgraded on 15 January 2013‚ following the downgrade of the South African sovereign to 'BBB' from 'BBB+' on 10 January 2013. Absa Bank Limited‚ FirstRand Bank Limited‚ Nedbank Limited and The Standard Bank of South Africa Limited (SBSA) and their relevant rated holding companies all have VRs of 'bbb' which are effectively capped at the sovereign rating at this rating level. Investec Bank Limited is rated one notch lower at 'bbb-'.

“The downgrade of the banks' VRs reflects the five major banks' concentration to South Africa‚ a high proportion of liquid assets invested in government securities and a weakening operating environment‚” says Denzil De Bie‚ a Director in Fitch's Financial Institutions team.

“Revenues are recovering from three years of subdued growth‚ although longer-term growth may be constrained by sustained low interest rates‚ slower GDP growth and a relatively saturated lending market‚ which may put pressure on credit growth in the sector's traditional business areas‚” adds De Bie. “Near-term improvements may still be possible from higher margins arising from the trending change in the major banks' loan book mix‚ with the exception of Investec‚ but longer term‚ these improvements are likely to be balanced by higher impairments.”

Despite a weakening operating environment‚ the South African banks' non-performing loan (NPL) ratios have been improving since 2010 following a turn in the credit cycle. Lower NPLs have been supported by sustained low interest rates. Fitch considers that the more easily rehabilitated home loan NPLs in the sector have been dealt with‚ leaving a more stubborn stock which will take longer to address. In the medium term‚ Fitch expects loan loss impairments for the major banks‚ excluding Investec‚ to stabilise at 100bp-120bp. The agency expects Investec's impairment charge ratio to remain stable at a lower level due to its different loan book composition as a specialist bank and asset manager.

The special report highlights some of the key rating drivers for South Africa's major banks in the context of their 'bbb' range Viability Ratings.

Fitch considers the major banks' Fitch Core Capital (FCC) ratios to be appropriate for the operating environment.

The agency believes that all the South African banks will be able to comply with the Basel III liquidity coverage ratio‚ supported by a committed facility from the South African Reserve Bank. Conversely‚ the net stable funding ratio (NSFR) requirement would pose significant challenges in its current form. - I-Net Bridge