Moody's downgrades South African banks, concluding review focusing on systemic support assumptions

Limassol, February 28, 2012 -- Moody's Investors Service has today downgraded by one notch the senior debt and deposit ratings of five South African banks: Standard Bank of South Africa, Absa Bank Limited, FirstRand Bank Limited, Nedbank Limited, and Investec Bank Ltd. The downgrades reflect the impact of the country's increasingly constrained public finances and Moody's view that authorities would face challenging policy choices if multiple institutions were to need its financial support at the same time. The downgrades are part of Moody's global assessment of the systemic support levels incorporated in banks' deposit and debt ratings, which addresses the growing difficulties governments face in extending systemic support to their banking systems.

Today's rating action is not driven by a deterioration in the standalone financial strength or the financial performance of these five institutions and concludes Moody's review for downgrade of these banks, initiated on 10 November 2011 (please see "Moody's reviews five South African banks for downgrade" for more information).

In addition, Moody's also downgraded by one notch the subordinated debt instruments of the above-mentioned banks, in addition to African Bank Limited's EMTN subordinated debt programme ratings. These downgrades reflect the removal of systemic support assumptions from the subordinated debt instruments of South African banks, prompted by Moody's expectation that authorities will likely make greater use of their resolution tools to allow burden sharing with subordinated bondholders.

A full list of banks' ratings affected by this action is provided at the end of this announcement.

RATINGS RATIONALE

REASSESSMENT OF SYSTEMIC SUPPORT

Moody's reassessment of the support environment assumes a reduced capacity of the South African authorities to provide support to financial institutions if needed. This reduced capacity is also signalled by the negative outlook on South Africa's A3 rating (please see "Moody's changes outlook on South Africa's A3 government ratings to negative from stable" dated 9 November 2011 for more information), which reflects the potential of increased pressure on the government's finances. The reassessment is in line with recent global trends, where sovereigns dealing with a systemic banking crisis possess more limited options and face constrains in providing financial support.

The change in systemic support assumptions has resulted in the reduction of systemic support rating uplift to one notch from two notches before, for the five largest South African banks. Despite the South African government's more constrained financial flexibility to absorb banking-related contingent liabilities under a tail-risk scenario, Moody's believes that systemic support is still warranted in the banks' ratings as the authorities have sufficient powers to intervene, despite some constraints.

In addition, Moody's does not foresee any meaningful political resistance from either the government or the electorate that would compromise in any significant way SARB's willingness and ability to support the banking system. Moody's also believes that the five largest South African banks are systemically important institutions for the country's payment system, and that authorities would be willing to support them if required.

REMOVAL OF SYSTEMIC SUPPORT FROM SUBORDINATED DEBT

Moody's has also removed systemic support from the subordinated debt instruments of South African banks. The rating action was prompted by the rating agency's view that systemic support may not be extended to these instruments in case of financial distress. Subordinated debt is typically recognised in banks' capital structure as Tier 2 capital, and we expect South African authorities to make greater use of their resolution tools to allow burden sharing with subordinated bondholders.

Subordinated debt is now rated one notch lower than a bank's standalone rating or adjusted standalone rating in the case of Absa Bank that incorporates parental support, while any undated junior subordinated debt is rated two notches below the standalone rating or adjusted standalone rating.

ABSA BANK

Following the adjustment in Absa Bank's ratings to reflect the lower systemic support, Absa Bank's ratings have been left on review, in line with the review for downgrade of the standalone ratings of its parent, Barclays Bank (owns 55.5% of Absa Bank), announced on 15 February 2012 (please see "Moody's Reviews Ratings for European Banks" for more information). The review indicates that Barclay's A3 standalone credit strength, as reflected by its BFSR of C, could be lowered to either the same level as Absa's Baa1 standalone credit strength, or lower.

Consequently, Moody's will review the parental support incorporated in Absa's ratings, following the conclusion of Barclay's standalone rating review and an assessment of its financial capacity to support its African subsidiary if required. Moody's notes that Absa's ratings currently benefit from one notch of rating uplift due to parental support from a financially stronger parent bank, which may no longer be the case going forward.

Moody's also acknowledges that Absa, which accounts for approximately 10% of Barclays group's total revenues, will continue to benefit from and leverage the banking and operational expertise available from the parent bank. Furthermore, Absa remains a self-sufficient and operationally independent entity without any funding dependence from Barclays.

WHAT COULD MOVE THE RATINGS UP/DOWN

Any indication of a weakening of the South African authorities' willingness to support any of the above-mentioned banks or any significant deterioration in their capacity to extend financial support, could negatively affect the banks' deposit and debt ratings.

Moody's believes there is little likelihood of any upward rating momentum driven by increased systemic support for the banks covered by today's announcement, or from a strengthening of their stand-alone credit assessments in the currently challenging economic environment.

METHODOLOGY USED

The principal methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology, published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology, published in March 2007. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

RATINGS AFFECTED BY TODAY'S ACTION

Standard Bank of South Africa

-- The global local currency (GLC) long-term deposit rating has been downgraded to A2 from A1 and has been assigned a negative outlook, in line with the outlook of the A3 sovereign rating. This implies that a possible downgrade of the sovereign rating, which would also trigger lowering our systemic support assumptions for South Africa, is likely to affect the bank's GLC long-term deposit rating as well.

-- The C BFSR (stable outlook), the P-1 local-currency short-term deposit rating, the A3 long-term foreign-currency deposit rating (negative outlook) and the P-2 short-term foreign-currency deposit rating, all remain unaffected

Absa Bank Limited

-- The GLC long-term deposit rating and the long-term national-scale deposit rating have been downgraded to A2 and Aa2.za, from A1 and Aa1.za respectively and have been both left on review for possible downgrade.

-- With regards to the bank's EMTN programme, the provisional foreign-currency senior unsecured debt rating has been downgraded to (P)A2 from (P)A1. Any issued foreign-currency senior unsecured debt has been downgraded to A2 from A1. The provisional foreign-currency subordinated and junior subordinated debt ratings under its EMTN programme have also been downgraded to (P)Baa1 and (P)Baa2, from (P)A2 and (P)Baa1 respectively. All ratings have been left on review for possible downgrade.

-- The C- BFSR (stable outlook), the P-1 short-term local-currency deposit rating, the A3 long-term foreign-currency deposit rating (negative outlook), the P-2 short-term foreign-currency deposit rating and the P-1.za national-scale short-term deposit rating, all remain unaffected.

United Towers (Proprietary) Ltd [subsidiary and preference shares vehicle of Absa Bank Limited]

-- The long-term national-scale issuer rating has been downgraded to A1.za from Aa3.za, due to the downgrade of the parent bank's GLC long-term deposit rating that guarantees United Towers' preference share obligations. The rating was also placed on review for possible downgrade.

-- The P-1.za short-term national-scale issuer rating remains unaffected.

FirstRand Bank Limited

-- The GLC deposit ratings have been downgraded to A3/P-2 (stable outlook) from A2/P-1. The long-term national-scale deposit rating of Aa2.za has been confirmed.

-- With regards to the bank's EMTN programme, the foreign-currency senior unsecured debt rating has been downgraded to (P)A3 (stable outlook), from (P)A2. Any issued foreign-currency senior unsecured debt has been downgraded to A3 (stable outlook), from A2.

-- The foreign-currency commercial paper has been downgraded to P-2 from P-1.

-- With regards to the bank's domestic MTN programme, the provisional local-currency senior unsecured debt rating has been downgraded to (P)A3 (stable outlook) from (P)A2. The provisional local-currency subordinated and junior subordinated debt ratings have also been downgraded to (P)Baa2 and (P)Baa3 (both with stable outlook), from (P)A3 and (P)Baa2 respectively. The provisional short-term local-currency rating has been downgraded to (P)P-2 from (P)P-1. The Aa2.za national-scale rating for senior unsecured debt has been confirmed. The national-scale rating for subordinated debt and for junior subordinated debt have been downgraded to A1.za and A2.za, from Aa3.za and A1.za respectively. Any issued local-currency junior subordinated debt has been downgraded to Baa3(hyb) (stable outlook) from Baa2(hyb), and any national-scale junior subordinated debt has been downgraded to A2.za(hyb) from A1.za(hyb).

-- The C- BFSR (stable outlook), the P-1.za national-scale short-term deposit rating, the A3 long-term foreign-currency deposit rating (negative outlook) and the P-2 short-term foreign-currency deposit rating, all remain unaffected.

Nedbank Limited

-- The GLC deposit ratings have been downgraded to A3/P-2 (stable outlook) from A2/P-1. The Aa2.za long-term national-scale deposit rating has been confirmed.

-- With regards to the bank's EMTN programme, the provisional foreign-currency senior unsecured debt rating and the subordinated debt rating have been downgraded to (P)A3 and (P)Baa2 (both with stable outlook), from (P)A2 and (P)A3 respectively. Any issued foreign-currency subordinated debt has been downgraded to Baa2 (stable outlook) from A3.

-- With regards to the bank's domestic MTN programme, the Aa2.za national-scale rating for senior unsecured debt has been confirmed. The national-scale rating for subordinated debt has been downgraded to A1.za from Aa3.za.

-- The C- BFSR (stable outlook), the A3 long-term foreign-currency deposit rating (negative outlook), the P-2 short-term foreign-currency deposit rating, the P-1.za national-scale short-term deposit rating and the national-scale hybrid Tier 1 rating of A3.za(hyb) (stable outlook) remain unaffected.

Investec Bank Ltd

-- The GLC deposit ratings and the long-term national-scale deposit rating have been downgraded to A3/P-2 (stable outlook) and Aa3.za, from A2/P-1 and Aa2.za, respectively.

-- With regards to the bank's EMTN programme, the provisional foreign-currency senior unsecured debt rating and the subordinated debt rating have also been downgraded to (P)A3 and (P)Baa2 (both with stable outlook), from (P)A2 and (P)A3, respectively.

-- The C- BFSR (stable outlook), the A3 long-term foreign-currency deposit rating (negative outlook), the P-2 short-term foreign-currency deposit rating and the P-1.za national-scale short-term deposit rating remain unaffected.

African Bank Limited

-- With regards to the bank's EMTN programme, the provisional foreign-currency subordinated debt rating has been downgraded to (P)Ba1 (stable outlook), from (P)Baa3. The bank does not currently have any outstanding subordinated debt under its EMTN programme.

-- The D+ BFSR (stable outlook), the GLC and foreign-currency deposit ratings of Baa2/P-2 (stable outlook), the long-term senior unsecured debt ratings of Baa2 and (P)Baa2 (stable outlook), and the national-scale deposit ratings of A1.za/P-1.za remain unaffected.

At the end of June 2011, Standard Bank of South Africa Limited had total assets of ZAR837.8 billion (USD122.4 billion), FirstRand Bank Limited had total assets of ZAR616.7 billion (USD90.1 billion) and Nedbank Limited had total assets of ZAR580.1 billion (USD84.8 billion). At the end of September 2011, Investec Bank Limited had total assets of ZAR251.7 billion (USD31.8 billion) and African Bank Limited had total assets of ZAR46 billion (USD5.8 billion). At the end of December 2011, Absa Bank Limited had total assets of ZAR742.4 billion (USD91.2 billion). All banks are headquartered in Johannesburg, South Africa.

Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Methodology published in March 2011 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entities or their designated agents and issued with no amendment resulting from that disclosure.

Information sources used to prepare the ratings are the following: parties involved in the ratings, and public information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

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Nondas Nicolaides
Vice President - Senior Analyst
Financial Institutions Group
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