Action follows Sovereign rating action, concludes review for downgrade
Limassol, May 10, 2016 -- Moody's Investors Service ("Moody's") has today confirmed the Baa2 long-term
deposit ratings of the five largest South African banks: Standard
Bank of South Africa, FirstRand Bank Limited, ABSA Bank Limited,
Nedbank Limited, and Investec Bank Ltd. The rating agency
has also confirmed Standard Bank Group's Baa3 issuer rating, while
downgrading Absa Bank's baseline credit assessment (BCA) to baa3
from baa2. A full list of the banks' ratings affected by today's
rating action is at the end of this press release.
The rating action concludes the review for downgrade on the banks'
ratings that was initiated on 10 March 2016. The banks' national-scale
ratings, which were also on review, are addressed in a separate
press release.
Today's rating action is driven primarily by Moody's prior decision to
confirm South Africa's sovereign rating (Baa2), on 6 May 2016 (please
refer to the press release: Moody's confirms South Africa's sovereign
rating at Baa2 and assigns a negative outlook [https://www.moodys.com/research/--PR_348291]),
which alleviates the downward pressure on the banks' credit profiles
due to their sizable holdings of sovereign debt securities that link their
creditworthiness to that of the national government. The action
also takes into account Moody's expectation that the banks will
generally show resilience in their financial performance despite the current
economic slowdown in South Africa.
While Absa's deposit ratings were confirmed at Baa2, Moody's
downgraded the bank's BCA to baa3 from baa2 given its weaker capital
and asset quality metrics compared with peers.
The negative outlook assigned to all five South African banks takes into
account the negative outlook assigned to the sovereign rating and the
impairment risks that the banks will continue to face over the next 12-18
months given the difficult operating environment.
RATINGS RATIONALE
-- CONFIRMATION OF THE SOUTH AFRICAN GOVERNMENT'S
RATING ALLEVIATES PRESSURE ON BANKS' CREDIT PROFILE
The rating action is primarily driven by the confirmation of the South
African government's debt rating at Baa2, which alleviates pressure
on the banks' credit profile as the banks' high stocks of government
debt securities, held as part of their liquidity requirements,
links their credit profiles to that of the government. The top
five banks' overall sovereign exposure, including loans to state-related
entities, averages around 143% of their capital bases,
according to South African Reserve Bank's (SARB) regulatory returns (BA900)
as of February 2016. In view of the correlation between sovereign
and bank credit risk, the banks' standalone credit profiles and
ratings are inevitably constrained by the rating of the government.
In addition, the rating agency notes that the rating confirmation
also takes into account its expectation that banks will show relative
resilience in their financial performance within a lower growth environment.
Moody's expects South Africa's economic growth to pick-up
beyond 2016. South African banks have been performing well in recent
years, and are thus well prepared and positioned to weather the
headwinds ahead. Moody's expects that banks' performance
will likely soften during 2016-17, but with limited or no
impact on their capital levels as earnings will cover rising impairments.
The top five large banks comprise almost 90% of total assets of
the banking system, which according to SARB reported return on assets
(RoA) of 1.2%, non-performing loans to gross
loans (NPL ratio) of 3.1% and a common equity Tier 1 (CET1)
ratio of 10.9% as of December 2015.
-- ABSA BANK'S DEPOSIT RATINGS CONFIRMED; BCA
DOWNGRADED
Absa Bank's deposit ratings were confirmed at Baa2, taking
into account the rating agency's 'High' government support
assumption, in case of need, due to the bank's systemic
importance with a deposits market share of 20.7% as of December
2015. Such government support assumptions provide one notch of
rating uplift to its deposit ratings, from the bank's revised
standalone BCA of baa3. The rating agency also notes that it lowered
Absa Bank's parental support assumptions to 'Moderate'
from 'Very High' following Barclays Bank PLC's (deposits
and senior unsecured debt rating A2 stable, BCA of baa2) decision
to reduce its 62.3% shareholding in Absa Bank's holding
company Barclays Africa Group Limited (BAGL) to less than 20% in
the next 2-3 years (it already decreased its stake to 50.1%
on 4 May 2016). As a result, parental support does not provide
any rating uplift to Absa Bank's deposit ratings.
Concurrently, Moody's downgraded Absa Bank's BCA to
baa3 from baa2, mainly due to its weaker capital and asset quality
metrics relative to its similarly-rated local peers. The
bank reported a CET1 ratio of 10.3% in December 2015,
down from 10.6% in December 2014, positioning the
bank at the lower end of its peer group. The bank's core
capital base has been weakening since 2013, mainly on account of
material dividend payments to its holding company BAGL. In addition,
Absa Bank's NPL ratio of 3.3% in December 2015,
although on an improving trend in recent years, is the highest among
its peers. This results in Absa Bank's credit loss ratio
(loan loss provisions over gross loans) of 0.89% as of December
2015, while its proportionally higher household exposure makes Absa
Bank's credit profile more vulnerable to the current credit cycle.
-- NEGATIVE OUTLOOK REFLECTS SOVEREIGN OUTLOOK AND CHALLENGES
AHEAD
The negative outlook assigned to all the banks' ratings is primarily
linked to the negative outlook on the sovereign rating, which is
itself partly driven by the weak economic environment. The weakening
credit quality of sovereign bonds weighs on the banks' own creditworthiness
given their large holdings of government securities.
Likewise, although Moody's expects the banks to largely remain
resilient, the weak economic environment increases the downside
risks for the banks' asset quality. The rating agency expects
GDP growth of only 0.5% in 2016 and to pick up to 1.5%
in 2017, from 1.3% in 2015 and 1.5%
in 2014, levels significantly below the government's target growth
and the economy's potential.
This points to potentially higher impairments for the banks, exerting
some pressure on their earnings and testing the resilient performance
they have featured in recent years. However, Moody's does
not anticipate that the asset quality deterioration will compromise materially
banks' recurring earnings, and expects banks will maintain healthy
capital levels.
WHAT COULD MOVE THE RATINGS UP/DOWN
As indicated by the negative outlook on the sovereign rating, any
deterioration in the creditworthiness of South Africa would exert downward
pressure on the banks' ratings, in view of their sizeable holdings
of sovereign debt securities. In addition, the banks' ratings
could be downgraded if operating conditions worsen more than currently
anticipated, leading to significantly higher loan loss provisions
that prompt deterioration in the banks' earnings and capital metrics that
exceed the rating agency's expectations.
Conversely, any upwards rating momentum of the banks' ratings is
currently limited as their BCAs are constrained by the sovereign rating.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
January 2016. Please see the Ratings Methodologies page on www.moodys.com
for a copy of this methodology.
RATINGS AFFECTED BY TODAY'S ACTIONS
Issuer: ABSA Bank Limited
.... Baseline Credit Assessment downgraded
to baa3 from baa2
.... Adjusted Baseline Credit Assessment downgraded
to baa3 from baa2
.... LT Bank Deposits (Foreign Currency and
Local Currency) confirmed at Baa2 Negative from Rating Under Review
.... ST Bank Deposits (Foreign Currency and
Local Currency) confirmed at P-2
.... Counterparty Risk Assessment confirmed
at P-2(cr)
.... Counterparty Risk Assessment downgraded
to Baa2(cr) from Baa1(cr)
Issuer: FirstRand Bank Limited
.... Baseline Credit Assessment confirmed
at baa2
.... Adjusted Baseline Credit Assessment confirmed
at baa2
.... LT Bank Deposits (Foreign Currency and
Local Currency) confirmed at Baa2 Negative from Rating Under Review
.... ST Bank Deposits (Foreign Currency and
Local Currency) confirmed at P-2
.... Junior Subordinated Regular Bond/Debenture
(Local Currency) confirmed at Ba1 (hyb)
.... Subordinate MTN (Foreign Currency and
Local Currency) confirmed at (P)Ba1
.... Junior Subordinate MTN (Local Currency)
confirmed at (P)Ba1
.... Other Short Term (Local Currency) confirmed
at (P)P-2
.... Senior Unsecured MTN (Foreign Currency
and Local Currency) confirmed at (P)Baa2
.... Subordinate Regular Bond/Debenture (Local
Currency) confirmed at Ba1
.... Subordinate Regular Bond/Debenture (Local
Currency) confirmed at Baa3
.... Commercial Paper (Foreign Currency) confirmed
at P-2
.... Senior Unsecured Regular Bond/Debenture
(Foreign Currency and Local Currency) confirmed at Baa2 Negative from
Rating Under Review
.... Senior Unsecured Regular Bond/Debenture
(Foreign Currency), Assigned Baa2 Negative from (P)Baa2
.... Counterparty Risk Assessment confirmed
at P-2(cr)
.... Counterparty Risk Assessment confirmed
at Baa1(cr)
Issuer: Investec Bank Ltd.
.... Baseline Credit Assessment confirmed
at baa2
.... Adjusted Baseline Credit Assessment confirmed
at baa2
.... LT Bank Deposits (Foreign Currency and
Local Currency) confirmed at Baa2 Negative from Rating Under Review
.... ST Bank Deposits(Foreign Currency and
Local Currency) confirmed at P-2
.... Senior Unsecured Regular Bond/Debenture
(Foreign Currency) confirmed at Baa2 Negative from Rating Under Review
.... Tier III Debt MTN (Foreign Currency)
confirmed at (P)Baa3
.... Subordinate MTN (Foreign Currency) confirmed
at (P)Baa3
.... Senior Unsecured MTN (Foreign Currency)
confirmed at (P)Baa2
.... Counterparty Risk Assessment confirmed
at P-2(cr)
.... Counterparty Risk Assessment confirmed
at Baa1(cr)
Issuer: Nedbank Limited
.... Baseline Credit Assessment confirmed
at baa2
.... Adjusted Baseline Credit Assessment confirmed
at baa2
.... LT Bank Deposits (Foreign Currency and
Local Currency) confirmed at Baa2 Negative from Rating Under Review
.... ST Bank Deposits (Foreign Currency and
Local Currency) confirmed at P-2
.... Subordinate MTN (Foreign Currency) confirmed
at (P)Baa3
.... Senior Unsecured MTN (Foreign Currency)
confirmed at (P)Baa2
.... Subordinate Regular Bond/Debenture (Foreign
Currency) confirmed at Baa3
.... Counterparty Risk Assessment confirmed
at P-2(cr)
.... Counterparty Risk Assessment confirmed
at Baa1(cr)
Issuer: Standard Bank of South Africa
.... Baseline Credit Assessment confirmed
at baa2
.... Adjusted Baseline Credit Assessment confirmed
at baa2
.... LT Bank Deposits (Foreign Currency and
Local Currency) confirmed at Baa2 Negative from Rating Under Review
.... ST Bank Deposits (Foreign Currency and
Local Currency) confirmed at P-2
.... Senior Unsecured MTN (Foreign Currency)
confirmed at (P)Baa2
.... Counterparty Risk Assessment confirmed
at P-2(cr)
.... Counterparty Risk Assessment confirmed
at Baa1(cr)
Issuer: Standard Bank Group
.... LT Issuer Rating (Foreign Currency and
Local Currency) confirmed at Baa3 Negative from Rating Under Review
At the end of December 2015, Standard Bank Group had total assets
of ZAR1,981 billion ($128 billion), Standard Bank of
South Africa had total assets of ZAR1,277 billion ($83 billion),
FirstRand Bank Limited had total assets of ZAR1,020 billion ($66
billion), Absa Bank Limited had total assets of ZAR936 billion ($61
billion), and Nedbank Limited had total assets of ZAR861 billion
($56 billion). Investec Bank Limited had total assets of
ZAR366 billion ($26 billion) at the end of September 2015.
All banks are headquartered in Johannesburg, South Africa.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain 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 certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain 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.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Nondas Nicolaides
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Sean Marion
Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Confirms the Ratings of the Five Largest South African Banks; Negative Outlook
