Rating action follows the sovereign rating's review announcement
Limassol, April 04, 2017 -- Moody's Investors Service, ("Moody's") has
today placed on review for downgrade the Baa2 long-term local-
and foreign-currency deposit ratings of the five largest South
African banks: The Standard Bank of South Africa Limited (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 Limited's
Baa3 issuer rating. A full list of the banks' ratings affected
by today's rating action is at the end of this press release.
According to Moody's, today's rating action is driven primarily
by: (1) potential weakening of the South African government's credit
profile, in particular in the country's institutional,
economic and fiscal strengths, as captured by Moody's recent decision
to place South Africa's Baa2 government bond ratings on review for downgrade.
For further information, refer to the sovereign press release "Moody's
places South Africa's Baa2 ratings on review for downgrade" (https://www.moodys.com/research/--PR_364595).
The banks' sizable holdings of sovereign debt securities inevitably link
their creditworthiness to that of the national government; and to
a lesser extent, by (2) the challenges these banks face in view
of weak economic growth in South Africa and the protracted political tensions,
which are likely to induce fragile investor confidence, asset price
volatility and increased funding costs. These factors are likely
to put pressure on their operating income and resilient performance so
far.
RATINGS RATIONALE
-- 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 145% of
their capital bases, according to South African Reserve Bank's (SARB)
regulatory returns (BA900) as of January 2017. In view of the correlation
between sovereign and bank credit risk, these banks' standalone
credit profile and ratings are constrained by the rating of the government.
As a result, the baseline credit assessments (BCA) of baa2 assigned
to Standard Bank of South Africa, FirstRand Bank Limited,
Nedbank Limited, and Investec Bank Ltd have been placed on review
for downgrade, while the BCA of baa3 for ABSA Bank Limited is unaffected,
as it already captures the risks of a lower rated sovereign.
In addition, Moody's says that the rating reviews also take
into account the challenges that the banks' financial performance will
face because of South Africa's still subdued economic growth. The
rating agency expects GDP growth of only 1.1% in 2017 and
1.7% in 2018, levels significantly below the government's
target growth. These challenging economic conditions, combined
with potentially weaker investor confidence, volatility in asset
prices, and higher funding costs will likely pressure banks'
earnings and asset quality metrics, and challenge their resilient
performance 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 the likely impact on banks'
asset quality, securities holdings valuations, and funding
costs in light of the recent political developments and macro-economic
challenges. However, the rating agency also notes the broad
resilience demonstrated by South African banks in recent years,
which was supported by rising capital and liquidity buffers.
As part of the review process, Moody's will consider each bank's
recent financial performance, key rating drivers and potential vulnerabilities:
- Standard Bank of South Africa (SBSA) and Standard Bank Group
(SBG)
In assessing the forward-looking impact of South Africa's
challenging operating environment, Moody's will review SBSA's
profitability metrics. In 2016, operating income grew by
9%, lagging operating expenses growth of 12%,
which caused the bank's cost-to-income ratio to increase
to 59% in 2016 from 57.6% in 2015. The rating
agency will also monitor the evolution and future expectation of the bank's
credit impairment costs (particularly in mortgage loans, instalments
loans, finance leases and credit cards) in view of the high interest
rates, although SBSA's credit loss ratio improved to 0.87%
in 2016 from 0.92% in 2015. SBSA reported a Common
Equity Tier 1 (CET1) ratio (including unappropriated profits) of 13.7%
in December 2016, while the non-performing loans as a proportion
of gross loans (NPLs) improved slightly to 3.0% in 2016
from 3.1% in 2015.
In addition to SBSA's rating action, Moody's also placed
on review for downgrade the Baa3 long-term local-and foreign-currency
issuer rating of SBG. SBG's issuer rating is positioned one
notch lower than the local- and foreign-currency deposit
ratings 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 a challenging operating environment
and an expected pressure on its revenues, although the rating agency
notes the solid 18% year-on-year growth in its normalised
earnings in the first six-months as of December 2016 (the bank's
fiscal year-end is as of 30 June 2017). The bank's NPL ratio
increased marginally to 2.36% in December 2016 from 2.31%%
in December 2015, with the absolute level of NPLs increasing by
about 5% during the same period. Total NPL coverage ratio
is relatively high at 79% as of December 2016 and its credit loss
ratio remained at 0.79% as of December 2016. During
the rating review period, Moody's will gauge the evolution of NPLs
in the next 12-18 months and the impact on the bank's overall performance
and any material impact on its loss absorbance capacity. FRB reports
the strongest capitalisation among the five largest South African banks,
with a CET1 ratio of 14.1% as of December 2016, about
50 basis points higher than reported in December 2015.
- Absa Bank Limited
As part of its review of Absa Bank, Moody's will assess the
high likelihood of government support, in the context of a potentially
weakening government capacity, which currently results in one notch
uplift from its BCA of baa3 to a deposit rating of Baa2. The bank's
BCA of baa3 reflects consistently solid net profitability with net income
to assets ratio of around 1%. At the same time, capitalization
has improved with a CET1 ratio at 11.6% as of December 2016
up from 10.5% as of December 2015, although the cost
of risk has increased to 1.04% for 2016 from 0.89%
for 2015, which we understand is predominantly due to a large single
name exposure.
- Nedbank Limited
As part of its review of Nedbank Limited, Moody's will look
into the sustainability of the bank's strong year-on-year
profit growth of 21% in 2016, and how the weak economic conditions
and protracted political tensions in South Africa are likely to affect
profitability for 2017. Moody's will also examine the possible
impact on Nedbank Limited's asset quality and capital adequacy.
As of December 2016 Nedbank Group reported a slight uptick in non-performing
loans to 2.7% of gross loans (a good proxy for Nedbank Limited's
ratios) from 2.5% in 2015, while Nedbank Limited reported
a common equity Tier 1 ratio of 11.7% as of December 2016
(2015: 10.6%).
- Investec Bank Limited (IBL)
As part of its review of the credit implications for IBL, Moody's
will evaluate its financial performance, in the context of lower
headline earnings in the first six months of its financial year,
to September 2016, in view of a change in accounting treatment of
investment income from fair value to equity accounting. 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 1.25% in September 2016, a slight deterioration
from 1.13% in September 2015. IBL's credit
loss ratio of 0.30% is the lowest among the largest five
banks, supported by its larger exposure to non-household
borrowers who have displayed better capacity to withstand higher interest
rates. The bank's reported CET1 ratio was 10.5% as
of September 2016, although with the highest leverage ratio among
its local peers of 7.6%.
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 a
deterioration in their financial performance.
Conversely, there is no upwards rating momentum of banks' ratings,
as their standalone credit profiles are constrained by the sovereign rating.
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.
RATINGS PLACED ON REVIEW FOR DOWNGRADE BY TODAY'S ACTIONS
Issuer: Absa Bank Limited
....LT Bank Deposits (Local & Foreign
Currency), currently Baa2, Outlook changed To Rating Under
Review From Negative
....ST Bank Deposits (Local & Foreign
Currency), currently P-2
....LT Counterparty Risk Assessment,
currently Baa2(cr)
....ST Counterparty Risk Assessment,
currently P-2(cr)
Issuer: FirstRand Bank Limited
....LT Bank Deposits (Local & Foreign
Currency), currently Baa2, Outlook changed To Rating Under
Review From Negative
....ST Bank Deposits (Local & Foreign
Currency), currently P-2
....Senior Unsecured Regular Bond/Debenture,
currently Baa2, Outlook changed To Rating Under Review From Negative
....Subordinate, currently Baa3/Ba1
....Junior Subordinate, currently Ba1(hyb)
....Senior Unsecured MTN program, currently
(P)Baa2
....Subordinate MTN program, currently
(P)Ba1
....Junior Subordinate MTN program,
currently (P)Ba1
....Other Short Term, currently (P)P-2
....Commercial Paper, currently P-2
....Adjusted Baseline Credit Assessment,
currently baa2
....Baseline Credit Assessment, currently
baa2
....LT Counterparty Risk Assessment,
currently Baa1(cr)
....ST Counterparty Risk Assessment,
currently P-2(cr)
Issuer: Investec Bank Ltd.
....LT Bank Deposits (Local & Foreign
Currency), currently Baa2, Outlook changed To Rating Under
Review From Negative
....ST Bank Deposits (Local & Foreign
Currency), currently P-2
....Senior Unsecured Regular Bond/Debenture,
currently Baa2, Outlook changed To Rating Under Review From Negative
....Senior Unsecured MTN program, currently
(P)Baa2
....Subordinate MTN program, currently
(P)Baa3
....Tier III Debt MTN program, currently
(P)Baa3
....Adjusted Baseline Credit Assessment,
currently baa2
....Baseline Credit Assessment, currently
baa2
....LT Counterparty Risk Assessment,
currently Baa1(cr)
....ST Counterparty Risk Assessment,
currently P-2(cr)
Issuer: Nedbank Limited
....LT Bank Deposits (Local & Foreign
Currency), currently Baa2, Outlook changed To Rating Under
Review From Negative
....ST Bank Deposits (Local & Foreign
Currency), currently P-2
....Subordinate, currently Baa3
....Senior Unsecured MTN program, currently
(P)Baa2
....Subordinate MTN program, currently
(P)Baa3
....Adjusted Baseline Credit Assessment,
currently baa2
....Baseline Credit Assessment, currently
baa2
....LT Counterparty Risk Assessment,
currently Baa1(cr)
....ST Counterparty Risk Assessment,
currently P-2(cr)
Issuer: The Standard Bank of South Africa Limited
....LT Bank Deposits (Local & Foreign
Currency), currently Baa2, Outlook changed To Rating Under
Review From Negative
....ST Bank Deposits (Local & Foreign
Currency), currently P-2
....Senior Unsecured MTN program, currently
(P)Baa2
....Adjusted Baseline Credit Assessment,
currently baa2
....Baseline Credit Assessment, currently
baa2
....LT Counterparty Risk Assessment,
currently Baa1(cr)
....ST Counterparty Risk Assessment,
currently P-2(cr)
Issuer: Standard Bank Group Limited
....LT Issuer Rating (Local & Foreign
Currency), currently Baa3, Outlook changed To Rating Under
Review From Negative
OUTLOOK ACTIONS:
Issuer: Absa Bank Limited
....Outlook, Changed To Rating Under
Review From Negative
Issuer: FirstRand Bank Limited
....Outlook, Changed To Rating Under
Review From Negative
Issuer: Investec Bank Ltd.
....Outlook, Changed To Rating Under
Review From Negative
Issuer: Nedbank Limited
....Outlook, Changed To Rating Under
Review From Negative
Issuer: Standard Bank Group Limited
....Outlook, Changed To Rating Under
Review From Negative
Issuer: The Standard Bank of South Africa Limited
....Outlook, Changed To Rating Under
Review From Negative
RATINGS UNAFFECTED BY TODAY'S ACTIONS
Issuer: Absa Bank Limited
....NSR LT Bank Deposits (Local Currency),
Aa1.za
....NSR ST Bank Deposits (Local Currency),
P-1.za
....Baseline Credit Assessment, baa3
....Adjusted Baseline Credit Assessment,
baa3
Issuer: FirstRand Bank Limited
....NSR LT Bank Deposits (Local Currency),
Aaa.za
....NSR ST Bank Deposits (Local Currency),
P-1.za
....NSR Senior Unsecured Regular Bond/Debenture,
Aaa.za
....NSR Subordinate, Aa2.za/A1.za
....NSR Junior Subordinate, A1.za
(hyb)
....NSR Senior Unsecured MTN program,
Aaa.za
....NSR Subordinate MTN program, A1.za
....NSR Junior Subordinate MTN program,
A1.za
....NSR Other Short Term, P-1.za
Issuer: Investec Bank Ltd.
....NSR LT Bank Deposits (Local Currency),
Aa1.za
....NSR ST Bank Deposits (Local Currency),
P-1.za
Issuer: Nedbank Limited
....NSR LT Bank Deposits (Local Currency),
Aa1.za
....NSR ST Bank Deposits (Local Currency),
P-1.za
....NSR Pref. Stock Non-cumulative,
Baa1.za (hyb)
....NSR Senior Unsecured MTN program,
Aa1.za
....NSR Subordinate MTN program, Aa3.za
Issuer: The Standard Bank of South Africa Limited
....NSR LT Bank Deposits (Local Currency),
Aa1.za
....NSR ST Bank Deposits (Local Currency),
P-1.za
The local market analyst for Absa Bank Limited is Nitish Bhojnagarwala,
VP-Senior Analyst, Financial Institutions Group, Tel:+971.4.237.9563.
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.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead analyst and the Moody's legal entity that has issued the ratings.
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
MD - Financial Institutions
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
