Actions follow the change of the South African government's rating outlook to negative from stable
Limassol, December 17, 2015 -- Moody's Investors Service has today affirmed the Baa2 long-term
deposit and senior debt ratings and changed the corresponding rating outlook
to negative from stable, of the five largest South African banks:
Standard Bank of South Africa (SBSA), FirstRand Bank Limited (FRB),
ABSA Bank Limited, Nedbank Limited (NED), and Investec Bank
Limited (IBL). The rating agency has also affirmed Standard Bank
Group's Baa3 issuer rating, and changed the outlook to negative
from stable. A full list of the banks' ratings is at the end of
this press release.
Today's outlook changes are driven primarily by (1) the weakening credit
profile of the South African government's credit profile, as captured
by Moody's change in South Africa's sovereign rating (Baa2) outlook
to negative from stable on 15 December 2015, 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 and still-high consumer indebtedness that
will likely lead to increased loan impairments and earnings growth pressure
for the banks. The affirmation of all banks' deposit ratings also
reflect the banks' still solid profitability and capital buffers available
to absorb increased credit losses.
RATINGS RATIONALE
-- CHANGE IN BANKS' DEPOSIT RATINGS OUTLOOK TO NEGATIVE
FROM STABLE
Moody's has changed its deposit and senior debt ratings outlook to negative
from stable for SBSA, FRB, ABSA, NED and IBL primarily
due to the weakening prospects of the South African government's credit
profile, as captured by Moody's recent sovereign rating (Baa2) outlook
change to negative from stable. The banks' high sovereign exposure,
mainly in the form of government debt securities they hold 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 September 2015. In view
of the correlation between sovereign and bank credit risk, these
banks' ratings are constrained by the rating of the government.
As a secondary consideration, the outlook changes 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 1.4% in 2015-16 and
2% in 2017 from 1.5% in 2014, levels significantly
below the government's target growth and the 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 some modest pressure on their earnings.
-- DEPOSIT RATINGS AFFIRMATION AT Baa2
The affirmation of all banks' deposit ratings at Baa2, mainly
reflects the rating agency's views that the negative outlook appropriately
captures the pressures from economic headwinds at this rating level,
particularly in light of the banks' resilient earnings track-record
and capital buffers.
South African banks have already taken measures to strengthen their balance
sheets, including maintaining adequate capital buffers to absorb
losses and slowing down significantly their growth in the high-margin
unsecured retail lending market that has been deteriorating in recent
quarters. Although the rating agency expects that asset-quality
metrics and earnings-generating capacity will come under some pressure
amid increased loan loss provisions, it expects that these measures
will help the banks weather the headwinds. Moreover, while
banks' funding costs are likely to increase, they continue
to display adequate liquidity buffers and net interest margins.
Moody's also notes that as a result of the GDP growth slowdown,
its sovereign group has revised the 'Economic Strength' factor
incorporated in its sovereign rating scorecard for South Africa to 'Moderate+'
from 'High-'. This factor is also incorporated
in the macro profile score of the banking scorecard, although the
overall macro profile for South Africa remains unchanged at 'Moderate'.
As a result, the individual banks' scorecard outcomes remain
unaffected by this change, supporting their baseline credit assessments.
-- BANK SPECIFIC FACTORS
- Standard Bank of South Africa Limited and Standard Bank Group
SBSA's deposit rating (Baa2) outlook change to negative from stable is
mainly driven by its high sovereign exposure in the form of government
debt securities and loans to state-related entities, representing
around 123% of its capital base as of September 2015. In
view of the correlation between sovereign and bank credit risk,
SBSA's rating is constrained by the rating of the government. As
a secondary driver, the rating action also takes into account the
anticipated pressures on the bank's financial performance in view of the
weak economic conditions in South Africa. Over the next 12-18
months, Moody's expects SBSA to post modest earnings growth,
in view of potentially higher loan impairments from its personal and business
banking segment and scarce business opportunities.
SBSA's ratings affirmation is underpinned by its resilient performance
in recent years. The bank's H1 2015 performance included an 8%
year-on-year increase in profits, mainly benefited
by a 5% decline in loan loss provisions and despite a 15%
increase in operating expenses compared to a 9% increase in total
revenues. Moody's notes that the bank's credit loss ratio (loan
loss provisions % gross customer loans) came down to 1.11%
in June 2015 from 1.3% in June 2014, and its non-performing
loans (NPLs) to gross loans ratio declined to 3.1% in June
2015 from 3.5% in June 2014.
The bank's stand-alone credit profile also takes into account
its leading franchise in South Africa, especially in the corporate
segment, which ensures diversified and recurring sources of earnings,
combined with healthy capital levels. The rating agency notes SBSA's
common equity Tier 1 (CET1) ratio of 12.4% as of June 2015,
up from 12.2% in June 2014, providing an adequate
cushion for absorbing losses, although this has come down to 12%
in September 2015 following the payment of its interim dividend.
In addition to SBSA's rating action, Moody's also changed the long-term
issuer rating (Baa3) outlook of Standard Bank Group (SBG) to negative
from stable. 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.
- FirstRand Bank Limited
FRB's deposit rating (Baa2) outlook change to negative from stable
is underpinned by its overall sovereign debt exposure, amounting
to around 109% of its capital base as of September 2015.
In view of the correlation between sovereign and bank credit risk,
FirstRand Bank's rating continues to be aligned with the rating of the
government. To a lesser extent, the outlook change also reflects
Moody's expectation that the challenging economic conditions will moderate
its earnings growth in the foreseeable future. Although Moody's
recognises the bank's strong financial performance in recent years,
it expects increased impairments from the bank's retail and asset-finance
exposures going forward.
The affirmation of FRB's deposit rating at Baa2 reflects its continued
outperformance of its local peers, leveraging its successful transactional
banking franchise that contributes significantly to the group's revenues.
The bank's full-year performance as of June 2015 showed an impressive
23% year-on-year increase in normalised net profits,
posting the highest profitability ratios amongst its local peers with
a normalised return on equity of 22.9% and a return on assets
of 1.69%.
The rating agency also acknowledges FRB's high overall provisioning
coverage of its NPLs (2.2% as of June 2015) of approximately
87% in June 2015, and its strongest capital position among
its local peers with a CET1 ratio of 14.2% as of June 2015
(12.9% as of September 2015 excluding any unappropriated
profits and following the payment of dividends), up from 13.6%
in June 2014. Such financial fundamentals position FRB particularly
well amongst the South African banks to weather the challenges in the
economy over the next 12-18 months.
- ABSA Bank Limited
Absa Bank's overall sovereign exposure, at a high 166% of
its capital base as of September 2015, constitute the main driver
behind the change of its deposit rating (Baa2) outlook to negative from
stable. In view of the correlation between sovereign and bank credit
risk, Absa Bank's rating continues to be aligned with the rating
of the government. The rating action also reflects the likely pressure
on the bank's earnings from the challenging economic conditions.
To this end, Moody's notes that the bank's H1 2015 performance was
satisfactory with a 14% year-on-year increase in
profit for the period, on the back of an 11% decline in loan
impairment losses.
Moody's sees downward pressure on the bank's standalone baseline credit
assessment (BCA) of baa2, owing to its weaker capital base and higher
level of non-performing loans (NPLs) relative to its similarly-rated
local and global peers. In addition, Absa Bank is more vulnerable
to an asset quality deterioration, in view of its higher exposure
to households (including residential mortgages), which are generally
highly leveraged and more susceptible to the current interest rate increase
in South Africa. However, Moody's notes that Absa Bank's
deposit ratings could potentially benefit from the very high parental
support assumptions from Barclays Bank PLC (deposits A2 stable,
baseline credit assessment baa2), in case Absa Bank's BCA is downgraded.
Barclays Bank Plc owns 62.3% of the bank's holding company
Barclays Africa Group Limited.
Absa Bank's CET1 ratio decreased to 10% in June 2015 from 12.2%
in June 2013, which has weakened the bank's capital buffers to absorb
loan losses in case of need. This reduction was mainly driven by
special dividend payments in the last few years, which have restrained
the bank's internal capital generation. Moody's notes Absa Bank's
CET1 has further reduced to 9.5% in September 2015 and its
NPLs ratio of 3.4% as of June 2015, which although
down from 4.3% in June 2014, is still higher than
its similarly-rated local peers' average ratio of 2.6%
as of June 2015 and the global median for banks with a BCA of baa2 of
2.3% as of end-2014.
- Nedbank Limited
The primary driver of the change of Nedbank's deposit rating (Baa2) outlook
to negative from stable, is the bank's overall sovereign exposure
that stood at 162% of its capital base as of September 2015.
In view of the correlation between sovereign and bank credit risk,
Nedbank's rating continues to be aligned with the rating of the government.
As a secondary consideration, the rating action also reflects the
rating agency's expectation that the challenges in the economy will exert
some pressure of the bank's financial performance in the near term.
Moody's notes that the bank's H1 2015 performance has moderated,
with a 3.3% year-on-year increase in profit
for the period, despite the 3.8% decline in loan impairments
due to strong collections and client rehabilitations. The reduction
in the bank's NPL ratio to 2.5% in June 2015 from 2.8%
in June 2014, and the overall provisioning coverage of NPLs at 66%
in June 2015, better positions the bank for the current economic
slowdown, supporting its BCA. The bank's CET1 ratio increased
to 10.6% as of June 2015 from 10% in June 2014,
although this has reduced to 10.3% following the payment
of the interim dividend.
- Investec Bank Ltd.
Investec's deposit rating (Baa2) outlook change to negative from stable
is mainly driven by its high sovereign exposure mainly in the form of
government debt securities, which represented a high 166%
of its capital base as of September 2015. Accordingly, Investec
Bank's rating continues to be aligned with the rating of the government
in view of the correlation between sovereign and bank credit risk.
In addition, the negative outlook also takes into account the anticipated
pressures on the bank's financial performance (5.4% year-on-year
increase in profit after tax for the half-year as of September
2015) in view of the 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 that are usually very active in the equity markets.
Among the large South African banks, Investec reports the lowest
credit loss ratio (0.28% in September 2015) and NPLs (1.8%
in September 2015), which the rating agency expects to continue
to be the case. Moody's said that 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 compared to an average
50.3% for the other four larger banks in June 2015.
The bank's ratings also reflect the bank's high core liquidity (liquidity
coverage ratio of 125% as of September 2015) and comfortable funding
profile, balanced against its high property-related exposures
and lower margins and profitability metrics than its local peers.
WHAT COULD MOVE THE RATINGS UP/DOWN
As indicated by the negative outlook on the sovereign rating, any
further deterioration in the creditworthiness of South Africa 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 AFFIRMED BY TODAY'S ACTIONS
Affirmations:
..Issuer: ABSA Bank Limited
....LT Bank Deposits (Foreign Currency and
Local Currency), Affirmed Baa2 (outlook was changed to negative
from stable)
....ST Bank Deposits (Foreign Currency and
Local Currency), Affirmed P-2
....NSR LT Bank Deposits (Local Currency),
Affirmed A1.za
....NSR ST Bank Deposits (Local Currency),
Affirmed P-1.za
.... Adjusted Baseline Credit Assessment,
Affirmed baa2
.... Baseline Credit Assessment, Affirmed
baa2
.... Counterparty Risk Assessment, Affirmed
P-2(cr)
.... Counterparty Risk Assessment, Affirmed
Baa1(cr)
..Issuer: FirstRand Bank Limited
....LT Bank Deposits (Foreign Currency and
Local Currency), Affirmed Baa2 (outlook was changed to negative
from stable)
....ST Bank Deposits (Foreign Currency and
Local Currency), Affirmed P-2
....NSR LT Bank Deposits (Local Currency),
Affirmed A1.za
....NSR ST Bank Deposits (Local Currency),
Affirmed P-1.za
....Junior Subordinated Regular Bond/Debenture
(Local Currency), Affirmed Ba1 (hyb)
....NSR Junior Subordinated Regular Bond/Debenture
(Local Currency), Affirmed A3.za (hyb)
....NSR Junior Subordinate MTN (Local Currency),
Affirmed A3.za
....NSR Subordinate MTN (Local Currency),
Affirmed A3.za
....NSR Senior Unsecured MTN (Local Currency),
Affirmed A1.za
....Subordinate MTN (Foreign Currency and
Local Currency), Affirmed (P)Ba1
....Junior Subordinate MTN (Local Currency),
Affirmed (P)Ba1
....NSR Other Short Term (Local Currency),
Affirmed P-1.za
....Other Short Term (Local Currency),
Affirmed (P)P-2
....Senior Unsecured MTN (Foreign Currency
and Local Currency), Affirmed (P)Baa2
....Subordinate Regular Bond/Debenture (Local
Currency), Affirmed Ba1
....Subordinate Regular Bond/Debenture (Local
Currency), Affirmed Baa3
....NSR Subordinate Regular Bond/Debenture
(Local Currency), Affirmed A2.za
....NSR Subordinate Regular Bond/Debenture
(Local Currency), Affirmed A3.za
....Commercial Paper (Foreign Currency),
Affirmed P-2
....Senior Unsecured Regular Bond/Debenture
(Foreign Currency and Local Currency), Affirmed Baa2 (outlook was
changed to negative from stable)
....NSR Senior Unsecured Regular Bond/Debenture
(Local Currency), Affirmed A1.za
.... Adjusted Baseline Credit Assessment,
Affirmed baa2
.... Baseline Credit Assessment, Affirmed
baa2
.... Counterparty Risk Assessment, Affirmed
P-2(cr)
.... Counterparty Risk Assessment, Affirmed
Baa1(cr)
..Issuer: Investec Bank Ltd.
....LT Bank Deposits (Foreign Currency and
Local Currency), Affirmed Baa2 (outlook was changed to negative
from stable)
....ST Bank Deposits(Foreign Currency and
Local Currency), Affirmed P-2
....NSR LT Bank Deposits (Local Currency),
Affirmed A1.za
....NSR ST Bank Deposits (Local Currency),
Affirmed P-1.za
....Senior Unsecured Regular Bond/Debenture
(Foreign Currency), Affirmed Baa2 (outlook was changed to negative
from stable)
....Tier III Debt MTN (Foreign Currency),
Affirmed (P)Baa3
....Subordinate MTN (Foreign Currency),
Affirmed (P)Baa3
....Senior Unsecured MTN (Foreign Currency),
Affirmed (P)Baa2
.... Adjusted Baseline Credit Assessment,
Affirmed baa2
.... Baseline Credit Assessment, Affirmed
baa2
.... Counterparty Risk Assessment, Affirmed
P-2(cr)
.... Counterparty Risk Assessment, Affirmed
Baa1(cr)
..Issuer: Nedbank Limited
....LT Bank Deposits (Foreign Currency and
Local Currency), Affirmed Baa2 (outlook was changed to negative
from stable)
....ST Bank Deposits (Foreign Currency and
Local Currency), Affirmed P-2
....NSR LT Bank Deposits (Local Currency),
Affirmed A1.za
....NSR ST Bank Deposits (Local Currency),
Affirmed P-1.za
....NSR Subordinate MTN (Local Currency),
Affirmed A2.za
....NSR Senior Unsecured MTN (Local Currency),
Affirmed A1.za
....Subordinate MTN (Foreign Currency),
Affirmed (P)Baa3
....Senior Unsecured MTN (Foreign Currency),
Affirmed (P)Baa2
....NSR Pref. Stock Non-cumulative
(Local Currency), Affirmed Baa1.za (hyb)
....Subordinate Regular Bond/Debenture (Foreign
Currency), Affirmed Baa3
.... Adjusted Baseline Credit Assessment,
Affirmed baa2
.... Baseline Credit Assessment, Affirmed
baa2
.... Counterparty Risk Assessment, Affirmed
P-2(cr)
.... Counterparty Risk Assessment, Affirmed
Baa1(cr)
..Issuer: Standard Bank of South Africa
....LT Bank Deposits (Foreign Currency and
Local Currency), Affirmed Baa2 (outlook was changed to negative
from stable)
....ST Bank Deposits (Foreign Currency and
Local Currency), Affirmed P-2
....NSR LT Bank Deposits (Local Currency),
Affirmed A1.za
....NSR ST Bank Deposits (Local Currency),
Affirmed P-1.za
....Senior Unsecured MTN (Foreign Currency),
Affirmed (P)Baa2
.... Adjusted Baseline Credit Assessment,
Affirmed baa2
.... Baseline Credit Assessment, Affirmed
baa2
.... Counterparty Risk Assessment, Affirmed
P-2(cr)
.... Counterparty Risk Assessment, Affirmed
Baa1(cr)
..Issuer: Standard Bank Group
.... LT Issuer Rating (Foreign Currency and
Local Currency), Affirmed Baa3 (outlook was changed to negative
from stable)
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
March 2015. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
At the end of June 2015, Standard Bank Group had total assets of
ZAR1,859 billion ($132 billion), Standard Bank of South
Africa had total assets of ZAR1,203 billion ($86 billion),
FirstRand Bank Limited had total assets of ZAR950 billion ($68
billion), Absa Bank Limited had total assets of ZAR859 billion ($61
billion), and Nedbank Limited had total assets of ZAR802 billion
($57 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.
Kanika Business Centre
319 28th October Avenue
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.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's changes the outlook of five South African banks to negative; affirms deposit ratings at Baa2/P-2
