Rating action follows the sovereign rating's review announcement
Limassol, March 10, 2016 -- Moody's Investors Service, ("Moody's") has
today placed on review for downgrade the Baa2 long-term deposit
and senior debt 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 placed on review for downgrade Standard Bank
Group's Baa3 issuer rating. A full list of the banks' ratings is
at the end of this press release.
Today's rating action is driven primarily by (1) the increasing risk of
a weakening credit profile of the South African government, as captured
by Moody's decision to place on review for downgrade South Africa's sovereign
rating (Baa2) on 8 March 2016 (please refer to the press release:
Moody's places South Africa's Baa2 ratings on review for downgrade
(https://www.moodys.com/research/--PR_344855)),
as the banks' sizable holdings of sovereign debt securities link their
creditworthiness to that of the national government; and to a lesser
extent, by (2) the challenges these banks face in view of weaker
economic growth in South Africa, particularly in the context of
reduced commodity prices, consumer affordability pressures,
high consumer indebtedness and increasing interest rates that will likely
lead to elevated loan impairments. Overall we consider these developments
to be credit negative for South African banks, which will pressure
their operating income and resilient performance so far. To this
end, the rating review will also assess on a forward-looking
basis banks' earnings and capital buffers against risks stemming from
the increasingly challenging operating conditions.
RATIONALE FOR RATING REVIEW
-- WEAKENING CREDIT AND MACRO PROFILE OF THE SOUTH AFRICAN
GOVERNMENT EXERTS PRESSURE ON BANKS' CREDIT PROFILE
The rating action is primarily driven by the potential deterioration of
the South African government's credit profile, as captured by Moody's
recent rating action to place the sovereign rating (Baa2) on review for
downgrade. The banks' high sovereign exposure, mainly in
the form of government debt securities held as part of their liquid assets
requirement, links their credit profile to that of the government.
The top five banks' overall sovereign exposure, including loans
to state-related entities, averages around 144% of
their capital bases, according to South African Reserve Bank's (SARB)
regulatory returns (BA900) as of December 2015. In view of the
correlation between sovereign and bank credit risk, these banks'
standalone credit profile and ratings are inevitably constrained by the
rating of the government.
In addition, the rating reviews also take into account the challenges
that the banks' financial performance will face because of South Africa's
weakening economic growth. The rating agency expects GDP growth
of only 0.5% in 2016 and 1.5% in 2017,
from 1.3% in 2015 and 1.5% in 2014,
levels significantly below the government's target growth, the economy's
potential and its historical average of 4.9% during 2004-08.
These challenging economic conditions, combined with declining commodity
prices, increasing interest rates and high household indebtedness,
will lead to elevated credit risks and potentially higher impairments
for banks, exerting pressure on their earnings and challenging the
resilient performance they have featured so far.
-- FACTORS TO BE CONSIDERED IN THE RATING REVIEW
The rating review for downgrade will predominantly focus on the evolution
of the sovereign rating and how this impacts banks' credit profiles.
Moreover, Moody's will also assess (1) the risk of asset quality
deterioration and higher credit costs, (2) the banks' recurring
earnings-generating capacity in light of challenging operating
conditions, and (3) any potential negative pressure on their capital
levels, funding sources and the relevant cost of funding in light
of higher interest rates. However, the rating agency also
notes the broad resilience demonstrated by South African banks in the
past, including the management of the adverse economic environment
during the 2009 recession, combined with healthy buffers that will
help them cope with the strong headwinds.
Moody's also notes that as a result of the slowdown in GDP growth,
its sovereign group has revised the 'Economic Strength' factor incorporated
in its sovereign rating scorecard for South Africa to 'Moderate' from
'Moderate +'. This factor is also incorporated in the macro
profile score of the banking scorecard, which currently has an overall
macro profile for South Africa of 'Moderate'. Accordingly,
during the rating review Moody's will assess the relevant impact
on the macro profile for South Africa in its banking scorecard,
and the individual banks' scorecard outcome that underpins their baseline
credit assessments (BCAs).
As part of the review process, Moody's will assess the following
key rating drivers for each bank.
- Standard Bank of South Africa (SBSA) and Standard Bank Group
(SBG)
In assessing the forward-looking impact of the challenging operating
environment, Moody's will review SBSA's profitability metrics,
as operating expenses grew more (11%) than total revenues (7%)
during 2015, although net profit for the year was higher by 7%.
As a result the bank's cost-to-income increased to
57.6% in December 2015 from 56.2% in December
2014. The rating agency will also monitor the evolution of,
and future expectations for the bank's credit impairment costs,
particularly in mortgage loans, instalment loans, finance
leases and credit cards in view of the higher interest rates, although
its credit loss ratio (loan loss provisions % gross loans) decreased
to 0.84% in 2015 from 1.04% in 2014.
SBSA reported a common equity Tier 1 (CET1) ratio of 12.1%
as of December 2015, while non-performing loans (NPLs) to
gross loans declined to 3.1% in December 2015 from 3.3%
in December 2014. Concurrently, Moody's notes the 7.7%
increase in the absolute level of NPLs during 2015 signalling the potential
reversal of the improving asset quality trend in the past few years.
In addition to SBSA's rating action, Moody's also placed on review
for downgrade the Baa3 long-term issuer rating of SBG. SBG's
issuer rating is positioned one notch lower than the local-currency
deposit rating of its fully-owned main banking subsidiary SBSA,
reflecting the structural subordination of SBG's creditors to those of
SBSA. Consequently, a potential downgrade of SBSA's
ratings has a direct impact on its parent company's rating as well.
- FirstRand Bank Limited (FRB)
In terms of its review of FRB, Moody's will assess the performance
of its various operating franchises amid deteriorating credit conditions
and an expected pressure in its revenues, although the rating agency
notes the 8% year-on-year growth in its normalised
earnings in the first six-months as of December 2015 (the bank's
fiscal year-end is as of 30 June 2016). The bank's NPL ratio
marginally increased to 2.31% in December 2015 from 2.17%
in June 2015, with the absolute level of NPLs increasing by around
12% during the six-months period triggering a 13%
year-on-year increase in loan impairments, although
its credit loss ratio remained comfortable at 0.79% as of
December 2015. During the rating review period, Moody's
will try to gauge the evolution of NPLs in the next 12-18 months
and how this will impact the bank's overall performance.
FRB reports the strongest capitalisation among the five largest South
African banks, with a CET1 ratio of 13.6% as of December
2015, although down from 14.2% in June 2015.
- ABSA Bank Limited
As part of Moody's review of the expected impact of the challenging operating
environment, it will assess ABSA's earnings and capital metrics,
which are at the lower end of similarly rated local and global peers.
The bank's CET1 ratio declined to 10.3% in December 2015
from 10.6% in December 2014, following the declaration
of a sizeable overall dividend of ZAR9.5 billion in 2015 (ZAR10.4
billion in 2014) comprising around 95% of the bank's net
profit in 2015 (although ZAR5 billion in 2015 and ZAR3 billion in 2014
were invested back into ABSA's capital). The rating agency will
also evaluate the sustainability of the improvement in the bank's credit
loss ratio, which decreased to 0.89% in December 2015
from 0.94% in December 2014, and whether operating
expenses growth (4.3% in 2015) will continue to outpace
revenue growth (3.9% in 2015). ABSA reported NPLs
to gross loans of 3.3% in December 2015, down from
3.8% in December 2014, although this ratio continues
to be the highest among its local peers.
During the rating review, Moody's will also reassess its parental
support assumptions from Barclays Bank PLC (deposits A2 stable,
baseline credit assessment baa2) incorporated in Absa Bank's deposit ratings.
Although Barclays owns 62.3% of ABSA's holding company
Barclays Africa Group Limited, it recently stated its intention
to reduce its stake significantly over the next 2-3 years to minority.
In Moody's view, this signals the parent bank's reduced commitment
to its African exposures and willingness to support ABSA in case of need,
although the rating agency recognises the still significant reputational
risk for Barclays stemming from ABSA's operations in the interim
period.
- Nedbank Limited
In its review of the expected impact of the challenging operating environment,
the rating agency will assess Nedbank's softening earnings growth with
only a 2% increase in net profit in 2015, and how potentially
higher loan impairments (2.9% increase in 2015, mainly
driven by portfolio impairments) are likely to affect its results in 2016-17.
Moody's will also examine the possible impact on Nedbank's capital ratios,
noting that the bank reported a lower CET1 ratio of 10.6%
in December 2015, compared to 11% in December 2014,
as it places any excess capital at its holding company Nedbank Group Limited
that reported a CET1 ratio of 11.3% in December 2015.
The group's NPL ratio remained stable at around 2.5%
of gross loans in December 2015, although we note the 10.8%
increase in the absolute level of NPLs during 2015, and specifically
the almost 27% increase in wholesale defaulted advances,
which was mainly due to the reclassification of restructured exposures
as per SARB's directive 7/2015.
- Investec Bank Ltd. (IBL)
As part of its review of the credit implications for IBL, Moody's
will evaluate its financial performance (5.4% year-on-year
increase in profit after tax for the half-year as of September
2015) in view of the challenging economic conditions in South Africa.
Moody's expects that the recent decline in equity prices will have some
negative impact on the bank's client base, which is geared towards
high net worth individuals who are usually very active in the equity markets.
In addition, Moody's will also assess the expected performance of
the bank's loan book that has proved resilient so far with reported gross
NPLs to gross loans of only 1.8% in September 2015,
combined with the lowest credit loss ratio of 0.28%.
The bank's CET1 ratio of 10.4% as of September 2015 is supported
by its adequate leverage ratio of 7.9% and its conservatively
calculated risk-weighted assets that comprised a high 78%
of total assets in September 2015.
WHAT COULD MOVE THE RATINGS UP/DOWN
As indicated by the review for downgrade on the sovereign rating,
any further deterioration in the creditworthiness of South Africa or its
macro profile would exert additional 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 baseline credit assessments are constrained
by the sovereign rating.
RATINGS PLACED ON REVIEW BY TODAY'S ACTIONS
Issuer: ABSA Bank Limited
.... Baseline Credit Assessment of baa2
.... Adjusted Baseline Credit Assessment of
baa2
....LT Bank Deposits (Foreign Currency and
Local Currency) of Baa2
....ST Bank Deposits (Foreign Currency and
Local Currency) of P-2
....NSR LT Bank Deposits (Local Currency)
of A1.za
....NSR ST Bank Deposits (Local Currency)
of P-1.za
.... Counterparty Risk Assessment of P-2(cr)
.... Counterparty Risk Assessment of Baa1(cr)
-----------
Issuer: FirstRand Bank Limited
.... Baseline Credit Assessment of baa2
.... Adjusted Baseline Credit Assessment of
baa2
....LT Bank Deposits (Foreign Currency and
Local Currency) of Baa2
....ST Bank Deposits (Foreign Currency and
Local Currency) of P-2
....NSR LT Bank Deposits (Local Currency)
of A1.za
....NSR ST Bank Deposits (Local Currency)
of P-1.za
....Junior Subordinated Regular Bond/Debenture
(Local Currency) of Ba1 (hyb)
....NSR Junior Subordinated Regular Bond/Debenture
(Local Currency) of A3.za (hyb)
....NSR Junior Subordinate MTN (Local Currency)
of A3.za
....NSR Subordinate MTN (Local Currency) of
A3.za
....NSR Senior Unsecured MTN (Local Currency)
of A1.za
....Subordinate MTN (Foreign Currency and
Local Currency) of (P)Ba1
....Junior Subordinate MTN (Local Currency)
of (P)Ba1
....NSR Other Short Term (Local Currency)
of P-1.za
....Other Short Term (Local Currency) of (P)P-2
....Senior Unsecured MTN (Foreign Currency
and Local Currency) of (P)Baa2
....Subordinate Regular Bond/Debenture (Local
Currency) of Ba1
....Subordinate Regular Bond/Debenture (Local
Currency) of Baa3
....NSR Subordinate Regular Bond/Debenture
(Local Currency) of A2.za
....NSR Subordinate Regular Bond/Debenture
(Local Currency) of A3.za
....Commercial Paper (Foreign Currency) of
P-2
....Senior Unsecured Regular Bond/Debenture
(Foreign Currency and Local Currency) of Baa2
....Senior Unsecured Regular Bond/Debenture
(Foreign Currency) of (P)Baa2
....NSR Senior Unsecured Regular Bond/Debenture
(Local Currency) of A1.za
.... Counterparty Risk Assessment of P-2(cr)
.... Counterparty Risk Assessment of Baa1(cr)
-----------
Issuer: Investec Bank Ltd.
.... Baseline Credit Assessment of baa2
.... Adjusted Baseline Credit Assessment of
baa2
....LT Bank Deposits (Foreign Currency and
Local Currency) of Baa2
....ST Bank Deposits(Foreign Currency and
Local Currency) of P-2
....NSR LT Bank Deposits (Local Currency)
of A1.za
....NSR ST Bank Deposits (Local Currency)
of P-1.za
....Senior Unsecured Regular Bond/Debenture
(Foreign Currency) of Baa2
....Tier III Debt MTN (Foreign Currency) of
(P)Baa3
....Subordinate MTN (Foreign Currency) of
(P)Baa3
....Senior Unsecured MTN (Foreign Currency)
of (P)Baa2
.... Counterparty Risk Assessment of P-2(cr)
.... Counterparty Risk Assessment of Baa1(cr)
-----------
Issuer: Nedbank Limited
.... Baseline Credit Assessment of baa2
.... Adjusted Baseline Credit Assessment of
baa2
....LT Bank Deposits (Foreign Currency and
Local Currency) of Baa2
....ST Bank Deposits (Foreign Currency and
Local Currency) of P-2
....NSR LT Bank Deposits (Local Currency)
of A1.za
....NSR ST Bank Deposits (Local Currency)
of P-1.za
....NSR Subordinate MTN (Local Currency) of
A2.za
....NSR Senior Unsecured MTN (Local Currency)
of A1.za
....Subordinate MTN (Foreign Currency) of
(P)Baa3
....Senior Unsecured MTN (Foreign Currency)
of (P)Baa2
....NSR Pref. Stock Non-cumulative
(Local Currency) of Baa1.za (hyb)
....Subordinate Regular Bond/Debenture (Foreign
Currency) of Baa3
.... Counterparty Risk Assessment of P-2(cr)
.... Counterparty Risk Assessment of Baa1(cr)
-----------
Issuer: Standard Bank of South Africa
.... Baseline Credit Assessment of baa2
.... Adjusted Baseline Credit Assessment of
baa2
....LT Bank Deposits (Foreign Currency and
Local Currency) of Baa2
....ST Bank Deposits (Foreign Currency and
Local Currency) of P-2
....NSR LT Bank Deposits (Local Currency)
of A1.za
....NSR ST Bank Deposits (Local Currency)
of P-1.za
....Senior Unsecured MTN (Foreign Currency)
of (P)Baa2
.... Counterparty Risk Assessment of P-2(cr)
.... Counterparty Risk Assessment of Baa1(cr)
Issuer: Standard Bank Group
.... LT Issuer Rating (Foreign Currency and
Local Currency) of Baa3
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
January 2016. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
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.
Moody's National Scale Credit 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 credit 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 credit ratings, please refer to Moody's Credit rating
Methodology published in June 2014 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 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 Places on Review for Downgrade the Ratings of the Five Largest South African Banks
