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Rating Action:

Moody's changes the outlook of five South African banks to negative; affirms deposit ratings at Baa2/P-2

17 Dec 2015

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
No Related Data.
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Moody's Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody's Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody's Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and Moody's investors Service also maintain policies and procedures to address the independence of Moody's Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody's Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy."

Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody's Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001. MOODY'S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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