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Rating Action:

Moody's affirms the ratings of five South African banks, changes outlook to stable from negative

05 Apr 2022

Limassol, April 05, 2022 -- Moody's Investors Service ("Moody's") has today affirmed the Ba2 long-term deposit ratings of The Standard Bank of South Africa Limited, FirstRand Bank Limited, ABSA Bank Limited, Nedbank Limited and Investec Bank Ltd., the five largest banks in South Africa. The rating agency has also affirmed the Ba3 long-term issuer ratings of the holding companies Absa Group Limited and Standard Bank Group Limited. All other ratings and assessments on these banks were also affirmed. At the same time, Moody's has changed the outlook to stable from negative on the banks' long-term deposit and issuer ratings.

Today's actions follow Moody's affirmation of South Africa government's Ba2 issuer rating and change of outlook to stable from negative on 1 April 2022. For further information on the sovereign rating action, please refer to Moody's press release: https://www.moodys.com/research/--PR_464348.

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL464629 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

-- STABLE OUTLOOK

Today's decision to change the outlook to stable from negative reflects the recovery in banks' key financial metrics, including profitability and capital, and the stabilisation of the operating environment as reflected by the outlook change to stable for South Africa.

The banking sector has reported improving financial performance, as indicated by the recovery in profitability, with systemwide return on assets of 1.1% as of December 2021 (2020: 0.5%). Banks' balance sheets have also strengthened as shown by their stronger capital buffers, with the systemwide Common Equity Tier 1 (CET1) ratio increasing to 13.7% in December 2021 (June 2020: 12.3%) and broadly stable asset quality ratios, with systemwide impaired loans (a proxy to non-performing loans (NPLs)) at 4.5% of gross loans as of December 2021 (2020: 5.2%; 2019: 3.9%). The banks also enjoy good liquidity buffers.

Today's actions also reflect South Africa's improved fiscal outlook, which was accompanied by Moody's decision to affirm South Africa's Ba2 ratings and change the outlook to stable; this benefits the banking sector given the strong links of South African banks' credit profiles to that of the government. Banks, in addition to being influenced by the local operating environment, maintain large holdings in South African government securities, which they keep primarily for liquidity purposes. Moody's estimates banks' exposure to the broader public sector at around 16% of banking sector assets as of December 2021.

-- RATING AFFIRMATIONS

The decision to affirm ratings capture banks' recovering profitability, strengthened capital buffers, stabilizing asset quality ratios and good liquidity buffers, as described above. These strengths and improvements are balanced against relatively high asset risks, as high unemployment and inflation are hurting household finances while some corporate sectors still face subdued earnings prospects from the pandemic. Banks' high reliance on institutional deposits also remains a structural weakness, as such deposits are typically of shorter maturities, less diversified and confidence-sensitive.

BANK-SPECIFIC CONSIDERATIONS

- ABSA Bank Limited (ABSA Bank) and Absa Group Limited (Absa Group)

ABSA Bank's Ba2 deposit ratings reflect its solid local franchise, and sound risk management and liquidity, benefiting from a stable inflow of customer deposits and a liquidity coverage ratio (LCR) of 125% as of December 2021. Profitability has also recovered on the back of lower provisioning needs and higher net interest income, with the bank reporting a profit of ZAR10.6 billion (0.9% return on assets), while its CET1 capital ratio increased to 12.4%. Moody's expects however, asset risks to remain high, even though Stage 3 / NPLs declined slightly to 5.3% of gross loans. High reliance on institutional depositors also remains a structural weakness.

Absa Group's long-term issuer ratings are positioned one notch lower that the deposit ratings of ABSA Bank, reflecting the non-operational nature of Absa Group (a holding company), which results in the structural subordination of Absa Group's unsecured creditors to the creditors of ABSA Bank.

The stable outlook reflects the stable outlook on South Africa's government issuer rating, and this is partly linked to ABSA Bank's large exposure to government securities, estimated at 1.7x its capital as of December 2021.

- Nedbank Limited (Nedbank)

Nedbank's Ba2 deposit ratings reflect its solid local franchise, investments in digitalization that support its cost-cutting initiatives, and sound liquidity buffers. Profitability has also recovered on the back of lower provisioning needs, with the bank reporting a profit of ZAR9.2 billion (0.9% return on assets), while its CET1 capital ratio increased to 12.3%. Moody's expects however, asset risks to remain high, even though Stage 3 / NPLs declined slightly to 4.6% of gross loans. High reliance on institutional depositors also remains a structural weakness.

The stable outlook reflects the stable outlook on South Africa's government issuer rating, and this is partly linked to Nedbank's large exposure to government securities, estimated at 2.5x its capital as of December 2021.

- Investec Bank Ltd. (Investec Bank)

Investec Bank's Ba2 deposit ratings reflect its good risk management practices and focus on high-net worth individuals, which has translated into sound asset quality (with Stage 3/NPLs at 2.1% of gross loans as of September 2021); its strong capitalisation metrics, with a reported CET1 capital ratio of 15.7% as of December 2021, adequate to absorb unexpected losses; and its high liquidity buffers. However, Moody's expects the still difficult credit conditions and the bank's relatively high credit concentrations – to commercial and residential property-related borrowers – to maintain asset quality pressures, while the bank's funding base continues to rely on more confidence-sensitive wholesale deposits.

The stable outlook reflects the stable outlook on South Africa's government issuer rating, and this is partly linked to Investec Bank's large exposure to government securities and the public sector, estimated at 1.5x of total equity as of December 2021.

- The Standard Bank of South Africa Limited (SBSA) and Standard Bank Group Limited (SBG)

SBSA's Ba2 deposit ratings reflect the bank's sound capitalisation (12.6% reported CET1 ratio as of December 2021), robust risk-management, stabilising asset quality, high liquidity and solid profitability (0.8% net income to tangible assets during 1H2021), as well as its strong domestic corporate and retail franchise. These strengths are moderated by the bank's high exposure to sovereign debt (12% of assets and 1.8x its capital as of December 2021), and sizeable exposure to short-term institutional funding.

SBG's long-term issuer ratings remain positioned one notch lower than the deposit ratings of SBSA. The one-notch downward adjustment reflects the non-operational nature of SBG (a holding company), which results in the structural subordination of SBG's unsecured creditors to the creditors of SBSA.

The stable outlook reflects the stable outlook on South Africa's government issuer rating. The sovereign's credit profile has direct implications for SBSA and SBG given their significant holding of sovereign securities on their balance sheets.

- FirstRand Bank Limited (FRB)

FRB's Ba2 deposit ratings reflect the bank's strong capitalisation (14.1% reported CET1 ratio as of December 2021), stabilising asset quality, strong liquidity and profitability (1.7% net income to tangible assets during the six months ending December 2021) supported by a cross-border portfolio of multi-branded businesses combined with a strong transactional franchise. These strengths are moderated by the bank's high exposure to sovereign debt (15% of assets and 2.2x its capital as of December 2021), and sizeable exposure to short-term institutional funding (though declining and lower than peers).

The stable outlook reflects the stable outlook on South Africa's government issuer rating. The sovereign's credit profile has direct implications for FRB given its significant holding of sovereign securities on their balance sheets.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward pressure on the South African banks' ratings would require both a more robust operating and macro environment as reflected by a higher sovereign rating, and a further strengthening of the banks' financial metrics, especially their profitability and asset quality metrics.

Any deterioration in the operating conditions and in the creditworthiness of the South African sovereign will exert downward pressure on South African banks' ratings. In addition, banks' ratings could be downgraded in case of a material deterioration in the banks' solvency and liquidity position.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1269625. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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 May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1280297.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL464629 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• EU Endorsement Status

• UK Endorsement Status

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Lead Analyst

• Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

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 rating analyst and the Moody's legal entity that has issued the ratings.

The relevant office for each credit rating is identified in "Debt/deal box" on the Ratings tab in the Debt/Deal List section of each issuer/entity page of the website.

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.

Constantinos Kypreos
Senior Vice President
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
Client Service: 44 20 7772 5454

Antonello Aquino
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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