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Rating Action:

Moody's Places on Review for Downgrade the Ratings of the Five Largest South African Banks

10 Mar 2016

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
No Related Data.
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