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Rating Action:

Moody's downgrades the five largest South African banks to Baa3; outlook negative

12 Jun 2017

Rating action follows the sovereign rating's downgrade to Baa3

Limassol, June 12, 2017 -- Moody's Investors Service, ("Moody's") has today downgraded to Baa3 (negative outlook) from Baa2 (Rating Under Review outlook), the long-term local- and foreign-currency deposit ratings of the five largest South African banks: The Standard Bank of South Africa Limited, FirstRand Bank Limited, Absa Bank Limited, Nedbank Limited, and Investec Bank Ltd.. The rating agency has also downgraded Standard Bank Group Limited's long-term local- and foreign-currency issuer ratings to Ba1 from Baa3, and affirmed all banks' national scale ratings. A full list of the banks' ratings affected by today's rating action is at the end of this press release.

This rating action concludes the review initiated on 4 April 2017, and follows the weakening of the South African government's credit profile, as captured by Moody's similar rating action on the sovereign rating on 9 June 2017. For further information, refer to the sovereign press release (https://www.moodys.com/research/--PR_367769). The rating action also takes into account the reduced capacity of the government to provide support to banks in case of need.

RATINGS RATIONALE

WEAKENING CREDIT AND MACRO PROFILE OF THE SOUTH AFRICAN GOVERNMENT EXERTS PRESSURE ON BANKS

The primary driver for today's rating downgrades is the challenging operating environment in South Africa, characterized by a pronounced economic slowdown, and weakening institutional strength that has led Moody's to lower South Africa's Macro Profile score to 'Moderate-' from 'Moderate'. The lower Macro Profile exerts pressure on the individual factors on banks' scorecards, and implies that the country's banks need stronger loss-absorption and liquidity buffers to withstand the headwinds and in order to remain at the same rating levels.

The rating agency expects GDP growth of only 0.8% in 2017 and 1.5% in 2018, from 0.3% in 2016, 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 going forward, and challenge their resilient financial performance so far.

In addition, 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 more than 150% of their capital bases, according to South African Reserve Bank's (SARB) regulatory returns (BA900) as of March 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) assigned to The Standard Bank of South Africa Limited, FirstRand Bank Limited, Nedbank Limited, and Investec Bank Ltd have been downgraded to baa3 from baa2, while the BCA of baa3 for Absa Bank Limited has been affirmed, already capturing the downside risks emanating from its sovereign exposure.

IMPACT OF GOVERNMENT SUPPORT ON ABSA BANK LIMITED'S DEPOSIT RATINGS

Today's rating action also reflects the weaker capacity of the government to provide support to banks, in case of need. Specifically, Absa Bank Limited's deposit rating previously benefitted from a one-notch government support uplift, which was removed, given the downgrade of the sovereign that indicates the government's reduced capacity to provide support despite the bank's systemic importance. As a result, the rating agency has aligned its government support assumptions for all five commercial banks, resulting in no rating uplift from their corresponding BCAs and positioning their deposit ratings at par with the government's Baa3 bond rating.

NEGATIVE OUTLOOK REFLECTS SOVEREIGN OUTLOOK AND CHALLENGES AHEAD

The negative outlook assigned to all the banks' ratings is primarily linked to the negative outlook on the sovereign rating, which is itself partly driven by the weak economic environment. The weakening credit quality of sovereign bonds weighs on the banks' own creditworthiness given their large holdings of government securities.

Likewise, although Moody's expects banks' financial fundamentals to largely remain robust, the weak economic environment increases the downside risks for the banks' asset quality and core capital levels. The relatively weak economic growth points to potentially higher impairments for the banks, especially on the retail front, exerting some pressure on their earnings and testing the resilient performance they have demonstrated in recent years. However, Moody's does not anticipate that the asset quality deterioration will compromise materially banks' recurring earnings, and expects banks will maintain healthy capital levels.

AFFIRMATION OF NATIONAL SCALE RATINGS

According to Moody's, the decision to affirm the banks' national scale ratings (NSRs) follows the recalibration of South Africa's NSR mappings, triggered by the downgrade of South Africa's government bond rating. Moody's NSRs are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. Although the fundamental creditworthiness of the five largest South African banks has deteriorated, their relative credit positioning within South Africa has not materially changed, hence the decision to affirm the NSRs outlined towards the end of this press release.

INDIVIDUAL BANKS' MAIN RATING DRIVERS

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

The BCA of baa3 assigned to SBSA is underpinned by its resilient earnings profile and Moody's expectation that this trend will continue in 2017-18, following operating income growth of around 9% in 2016 and lower credit loss ratio at 0.87% in 2016 from 0.92% in 2015. The rating agency expects that the bank's operating expenses will be contained going forward, after an increase of 12% in 2016 due to certain one-off items that caused its cost-to-income ratio to increase to 59% in 2016 from 57.6% in 2015. SBSA's capital base remains comfortable with a reported Common Equity Tier 1 (CET1) ratio (including unappropriated Q1 2017 profits and following payment of the final 2016 dividend) of 12.7% in March 2017, while the non-performing loans as a proportion of gross loans (NPLs) improved slightly to 3.0% in 2016 from 3.1% in 2015.

SBG's issuer rating of Ba1 (downgraded from Baa3) is positioned one notch lower than the deposit ratings of its fully owned main banking subsidiary SBSA, reflecting the structural subordination of SBG's creditors to those of SBSA. SBG also remains well capitalized with a CET1 ratio of 13.4% as of March 2017, while its credit loss ratio was marginally higher at 1% in December 2016 reflecting the higher risk profile of its exposure to the rest of Africa.

- FirstRand Bank Limited (FRB)

FRB's standalone credit profile is driven by the solid performance of its various operating franchises amid challenging operating conditions, resulting in an 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, but remains the lowest among its local peers. Total NPL coverage ratio is also the highest at 79% as of December 2016, and its credit loss ratio remained manageable at 0.79% despite its higher exposure towards the more risky retail segment. Moody's expects some elevated pressure on the bank's NPLs in the next 12-18 months, although this is unlikely to significantly impact its overall performance in view of the bank's stringent underwriting standards. 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

Absa Bank Limited's Baa3 deposit rating is in line with the bank's baseline credit assessment (BCA) of baa3. The bank's baa3 BCA reflects consistently solid net profitability with net income to assets ratio of around 1%. At the same time, capitalization has improved with a reported CET1 ratio at 11.6% as of December 2016 up from 10.5% as of December 2015. Absa Bank's NPL ratio of 3% of gross loans is broadly in line with similarly-rated international peers, despite the increase in the cost of risk to 1.04% from 0.89% in 2015 predominantly due to a large single name exposure.

- Nedbank Limited

Nedbank's BCA of baa3 reflects its strong year-on-year profit growth of 21% in 2016, although Moody's expects that the challenges in the economy will exert some pressure on the bank's financial performance over the next 12-18 months due to potentially lower business activity and higher impairments. While credit costs have remained below the bank's expectations as of December 2016, there has been a slight uptick in non-performing loans to 2.8%, from 2.5% in 2015. At the same time, Moody's acknowledges the increase in the bank's common equity Tier 1 ratio to 12.3% as of March 2017, from 10.5% in March 2016, and the strengthening of its liquidity metrics with a daily average liquidity coverage ratio of 101% during the first three months of 2017.

- Investec Bank Limited (IBL)

IBL's strong asset quality, abundant liquidity and high leverage ratio drive its BCA of baa3. Although the bank's financial performance for the year ending March 2017 was not as strong as previous years (around 7% decline in profit after tax), this was largely driven by the change in accounting treatment of investment income from fair value to equity accounting. The rating agency notes that the bank's core income, including net interest income, net fee and commission income and trading income, was in fact higher by around 10.3% as of March 2017. In addition, Moody's expects the bank's asset quality to continue to be the strongest among its local peers, with reported gross NPLs to gross loans of only 1.54% in March 2017. IBL's credit loss ratio continued to be a low 0.29%, supported by its larger exposure to non-household borrowers who have displayed better capacity to withstand high interest rates. The bank's reported CET1 ratio was 10.8% as of March 2017, but its 7.6% leverage ratio is the highest among its local peers.

WHAT COULD MOVE THE RATINGS UP/DOWN

As indicated by the negative outlook on the sovereign rating, any deterioration in the creditworthiness of South Africa would exert 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 BCAs are constrained by the sovereign rating.

RATINGS AFFECTED BY TODAY'S ACTION

Downgrades:

Issuer: Absa Bank Limited

....LT Bank Deposits (Local & Foreign Currency), Downgraded to Baa3 from Baa2, Outlook Changed To Negative From Rating Under Review

....ST Bank Deposits (Local & Foreign Currency), Downgraded to P-3 from P-2

Issuer: FirstRand Bank Limited

....LT Bank Deposits (Local & Foreign Currency), Downgraded to Baa3 from Baa2, Outlook Changed To Negative From Rating Under Review

....ST Bank Deposits (Local & Foreign Currency), Downgraded to P-3 from P-2

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 from Baa2, Outlook Changed To Negative From Rating Under Review

....Subordinate, Downgraded to Ba2/Ba1 from Ba1/Baa3

....Junior Subordinate, Downgraded to Ba2(hyb) from Ba1(hyb)

....Senior Unsecured MTN program, Downgraded to (P)Baa3 from (P)Baa2

....Subordinate MTN program, Downgraded to (P)Ba2 from (P)Ba1

....Junior Subordinate MTN program, Downgraded to (P)Ba2 from (P)Ba1

....Commercial Paper, Downgraded to P-3 from P-2

....Other Short Term, Downgraded to (P)P-3 from (P)P-2

....Adjusted Baseline Credit Assessment, Downgraded to baa3 from baa2

....Baseline Credit Assessment, Downgraded to baa3 from baa2

....LT Counterparty Risk Assessment, Downgraded to Baa2(cr) from Baa1(cr)

Issuer: Investec Bank Ltd.

....LT Bank Deposits (Local & Foreign Currency), Downgraded to Baa3 from Baa2, Outlook Changed To Negative From Rating Under Review

....ST Bank Deposits (Local & Foreign Currency), Downgraded to P-3 from P-2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Downgraded to Baa3 from Baa2, Outlook Changed To Negative From Rating Under Review

....Senior Unsecured MTN program, Downgraded to (P)Baa3 from (P)Baa2

....Subordinate MTN program, Downgraded to (P)Ba1 from (P)Baa3

....Tier III Debt MTN program, Downgraded to (P)Ba1 from (P)Baa3

....Adjusted Baseline Credit Assessment, Downgraded to baa3 from baa2

....Baseline Credit Assessment, Downgraded to baa3 from baa2

....LT Counterparty Risk Assessment, Downgraded to Baa2(cr) from Baa1(cr)

Issuer: Nedbank Limited

....LT Bank Deposits (Local & Foreign Currency), Downgraded to Baa3 from Baa2, Outlook Changed To Negative From Rating Under Review

....ST Bank Deposits (Local & Foreign Currency), Downgraded to P-3 from P-2

....Subordinate, Downgraded to Ba1 from Baa3

....Senior Unsecured MTN program, Downgraded to (P)Baa3 from (P)Baa2

....Subordinate MTN program, Downgraded to (P)Ba1 from (P)Baa3

....Adjusted Baseline Credit Assessment, Downgraded to baa3 from baa2

....Baseline Credit Assessment, Downgraded to baa3 from baa2

....LT Counterparty Risk Assessment, Downgraded to Baa2(cr) from Baa1(cr)

Issuer: Standard Bank Group Limited

....LT Issuer Rating (Local & Foreign Currency), Downgraded to Ba1 from Baa3, Outlook Changed To Negative From Rating Under Review

Issuer: The Standard Bank of South Africa Limited

....LT Bank Deposits (Local & Foreign Currency), Downgraded to Baa3 from Baa2, Outlook Changed To Negative From Rating Under Review

....ST Bank Deposits (Local & Foreign Currency), Downgraded to P-3 from P-2

....Senior Unsecured MTN program, Downgraded to (P)Baa3 from (P)Baa2

....Adjusted Baseline Credit Assessment, Downgraded to baa3 from baa2

....Baseline Credit Assessment, Downgraded to baa3 from baa2

....LT Counterparty Risk Assessment, Downgraded to Baa2(cr) from Baa1(cr)

Confirmations:

Issuer: Absa Bank Limited

....LT Counterparty Risk Assessment, Confirmed at Baa2(cr)

....ST Counterparty Risk Assessment, Confirmed at P-2(cr)

Issuer: FirstRand Bank Limited

....ST Counterparty Risk Assessment, Confirmed at P-2(cr)

Issuer: Investec Bank Ltd.

....ST Counterparty Risk Assessment, Confirmed at P-2(cr)

Issuer: Nedbank Limited

....ST Counterparty Risk Assessment, Confirmed at P-2(cr)

Issuer: The Standard Bank of South Africa Limited

....ST Counterparty Risk Assessment, Confirmed at P-2(cr)

Affirmations:

Issuer: Absa Bank Limited

....NSR LT Bank Deposits, Affirmed Aa1.za

....NSR ST Bank Deposits, Affirmed P-1.za

....Adjusted Baseline Credit Assessment, Affirmed baa3

....Baseline Credit Assessment, Affirmed baa3

Issuer: FirstRand Bank Limited

....NSR LT Bank Deposits, Affirmed Aaa.za

....NSR ST Bank Deposits, Affirmed P-1.za

....NSR Senior Unsecured Regular Bond/Debenture, Affirmed Aaa.za

....NSR Subordinate, Affirmed A1.za/Aa2.za

....NSR Junior Subordinate, Affirmed A1.za(hyb)

....NSR Senior Unsecured MTN program, Affirmed Aaa.za

....NSR Subordinate MTN program, Affirmed A1.za

....NSR Junior Subordinate MTN program, Affirmed A1.za

....NSR Other Short Term, Affirmed P-1.za

Issuer: Investec Bank Ltd.

....NSR LT Bank Deposits, Affirmed Aa1.za

....NSR ST Bank Deposits, Affirmed P-1.za

Issuer: Nedbank Limited

....NSR LT Bank Deposits, Affirmed Aa1.za

....NSR ST Bank Deposits, Affirmed P-1.za

....NSR Senior Unsecured MTN program, Affirmed Aa1.za

....NSR Subordinate MTN program, Affirmed Aa3.za

....NSR Pref. Stock Non-cumulative, Affirmed Baa1.za(hyb)

Issuer: The Standard Bank of South Africa Limited

....NSR LT Bank Deposits, Affirmed Aa1.za

....NSR ST Bank Deposits, Affirmed P-1.za

Outlook Actions:

Issuer: Absa Bank Limited

....Outlook, Changed To Negative From Rating Under Review

Issuer: FirstRand Bank Limited

....Outlook, Changed To Negative From Rating Under Review

Issuer: Investec Bank Ltd.

....Outlook, Changed To Negative From Rating Under Review

Issuer: Nedbank Limited

....Outlook, Changed To Negative From Rating Under Review

Issuer: Standard Bank Group Limited

....Outlook, Changed To Negative From Rating Under Review

Issuer: The Standard Bank of South Africa Limited

....Outlook, Changed To Negative From Rating Under Review

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.

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_1060333.

The Local Market analyst for Absa Bank Limited ratings is Nitish Bhojnagarwala, +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 rating 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: 852 3758 1350
Client Service: 44 20 7772 5454

Sean Marion
MD - Financial Institutions
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: 852 3758 1350
Client Service: 44 20 7772 5454

No Related Data.
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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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