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JOHANNESBURG - South Africa’s biggest banks, already battling an economic slowdown and decelerating profit growth, will have to contend with increased borrowing costs as bond yields spike and a credit-downgrade looms.

“Our expectation is that the sovereign will be downgraded before year-end,” said Bronwyn Blood, a fixed-income portfolio manager at Granate Asset Management. “This will lead to a downgrade for banks, which will have an impact on borrowing costs,” she added.

Banking shares were the biggest losers on the benchmark stocks index on Thursday, a day after Finance Minister Malusi Gigaba said the country’s debt levels would soar and Budget deficit widen. His Mid-Term Budget announcement caused the rand to plunge to its weakest level this year and spurred the biggest bond sell-off by foreigners in six years.

FirstRand said it expected its borrowing costs to rise in the next two months, with foreign borrowing rates to increase by 35 basis points. Spokesperson Sam Moss said while the banking group would continue to fund in the debt capital markets, new credit will cost customers more. “If South Africa’s local-currency rating is cut to junk, the bank’s borrowing charges will climb another 25 basis points to 35 basis points,” Moss pointed out.

Banks have been reining in lending as President Jacob Zuma’s administration struggles to reignite growth amid a divisive battle over who will succeed him as ANC president. “A sovereign downgrade may increase the cost of lending for our customers, particularly lending denominated in foreign currency,” said Standard Bank finance director Arno Daehnke.

About 5percent of the bank’s funding is raised by selling bonds and the lender is hedging its exposure to rising yields through the derivative market, he said. FirstRand, the continent’s largest lender by market value, in September said that net interest income grew 7percent for the 12 months through June compared, with an increase of 18percent in fiscal 2016.

Standard Bank, Absa and Nedbank all published first-half results in August that showed a similar pattern. The low asset growth is reducing the appetite banks have to raise debt to fund lending, said Harry Botha, a banks analyst at Avior Capital Markets.

“They are rolling some of their wholesale debt though, which does push up overall group funding costs slightly,” he said. A drop in the rand may cause inflation to accelerate and interest rates to increase, which could cause bad-debt charges to climb, said Adrian Cloete, a banks analyst at PSG Wealth. 

- BLOOMBERG