Rating Action: Moody's downgrades four South African banks; on review for further downgrade
Global Credit Research - 19 Aug 2014
Limassol, August 19, 2014 -- Moody's Investors Service has today downgraded by one notch the long term local-currency deposit ratings of the four largest South African banks, Standard Bank of South Africa (SBSA), Absa Bank Limited (Absa), FirstRand Bank Limited (FirstRand) and Nedbank Limited (Nedbank), to Baa1 from A3. The banks' long term national scale deposit ratings have also been downgraded to Aa3.za from Aa2.za. In the case of Absa, FirstRand and Nedbank, where Moody's rates their senior unsecured debt, associated debt ratings have also been downgraded to Baa1 from A3. All ratings of the above banks and their corresponding long term foreign-currency ratings, as well as those of Investec Bank Limited (Investec), were placed on review for downgrade.
The one notch downgrade of the local-currency deposit and senior unsecured debt ratings reflects Moody's view of the lower likelihood of systemic support from South African authorities to fully protect creditors in the event of need. This updated opinion was prompted, most recently, by the actions taken by the South African Reserve Bank (SARB) in response to the abrupt loss of creditor confidence in African Bank Limited (ABL).
The policy response addressed related liquidity and capital issues, thereby mitigating contagion risks with the further objective of minimising potential losses. However, the inclusion of a bail-in of senior unsecured bondholders and wholesale depositors indicates the regulator's willingness to impose losses on creditors. This needs to be reflected in Moody's ratings, as 1) debt ratings speak to both the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default and similarly 2) deposit ratings speak to banks' ability to repay punctually uninsured deposit obligations, including wholesale deposits.
The review for downgrade reflects the rating agency's concerns regarding weaker economic growth, particularly in the context of consumer affordability pressures and still high consumer indebtedness that are likely to lead to higher credit costs for the banks. Moody's notes the broad resilience demonstrated by South African banks in the past, including the management of adverse economic environments and recognises the solidity of key system financial metrics; however, the rating agency is also concerned about potential asset quality pressure building up in the retail, small and medium enterprise (SME) and corporate loans segment of the banks' portfolios. To this end, the review will focus on a forward-looking assessment of banks' capital, funding and liquidity buffers against risks stemming from the increasingly challenging operating conditions.
In addition to the aforementioned rating actions, Moody's also downgraded the long-term issuer rating of Standard Bank Group (SBG) to Baa2 from Baa1, with the ratings on review for further downgrade. 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.
A full list of banks' ratings affected by this action is provided near the end of this press release.
RATINGS RATIONALE
--- DOWNGRADE OF BANKS' LOCAL-CURRENCY DEPOSIT RATINGS
The downgrade of the four largest South African banks' long-term local-currency deposit and senior unsecured debt ratings, to Baa1 from A3, takes into account the removal of one notch of uplift for external support that was previously incorporated in the ratings. Moody's considers that the likelihood of systemic support being provided in the event of need for these banks, to fully protect senior creditors and depositors is now materially lower than previously thought, as implied by SARB's recent approach in resolving ABL. As a result of this rating action, the banks' local-currency deposit and senior unsecured debt ratings are now fully aligned with their Baa1 foreign currency deposit ratings, their baa1 standalone credit assessments and the Baa1 bond rating of the government of South Africa.
In Moody's opinion, SARB's willingness to proceed with a burden sharing restructuring plan for ABL, involving debt holders and wholesale depositors, is a clear indication of a reduction in the likelihood of systemic support being provided in the event of need, in a manner that would fully protect creditors. In this recent case, senior bondholders and wholesale depositors took a 10% haircut on their original investment/deposits, with subordinated bondholders incurring significantly higher losses.
Although these banks are much larger in size than ABL, and have significant retail deposit bases, the rating agency considers that in anticipation of the introduction of a formal resolution regime in South Africa, there is an increased risk that SARB could follow a similar approach in resolving problematic banks. As a result, Moody's believes that the level of systemic support previously incorporated in these banks' ratings needed to be revised.
--- RATIONALE FOR RATING REVIEW
The rating review for further downgrade reflects Moody's forward-looking concerns that the increasingly challenging economic conditions in South Africa will likely weigh on the banks' financial performance. Although Moody's acknowledges the banks' historically resilient financial performance, the rating agency expects that asset quality metrics and earnings-generating capacity could come under pressure amid increased loan loss provisions for retail and corporate lending. In particular, Moody's considers that South Africa's slowing economy (GDP quarter-on-quarter growth declined by -0.6% in Q1 2014), high inflation (6.6% in June 2014), labour unrest, still highly leveraged consumers (household debt to disposable income of a high 74.5% in Q1 2014) and reduced consumer affordability amid increasing interest rates will continue to pressure borrowers' loan repayment capabilities.
Moody's also considers that recent events related to ABL signal potentially higher downside risks for funding towards lenders in South Africa. While Moody's recognises that these banks' funding profiles are mainly in the form of customer deposits, they still maintain a reliance on wholesale funding. The recent developments could negatively impact their wholesale funding capacity and related cost going forward, particularly in the context of challenging operating conditions.
FACTORS TO BE CONSIDERED IN THE RATING REVIEW
The rating review for downgrade will focus on a forward-looking assessment of (1) the risk of asset quality deterioration and higher credit costs, (2) these banks' recurring earnings-generating capacity in light of challenging operating conditions, and (3) negative pressure on their capital levels and funding sources. However, in terms of the scope of the review the rating agency also notes the broad resilience demonstrated by South African banks in the past, including the management of adverse economic environments, and solidity of key system financial metrics, including healthy buffers that will facilitate the weathering of strong headwinds.
As part of the review process, Moody's will assess the following key rating drivers for each bank.
Standard Bank of South Africa
In assessing the forward-looking impact of the challenging operating environment, Moody's will pay particular attention to SBSA's profitability metrics, in view of the marginal 2% year-on-year increase in profit for the period during H1 2014, as operating expenses grew more (15%) than total revenues (9%). The rating agency will also monitor the evolution of the bank's credit impairment costs in its Personal and Business Banking (PBB) arm (annualised loan loss provisions to gross loans increased to 1.7% during H1 2014 from 1.46% in 2013), particularly in instalment loans, finance leases and credit cards, as a result of the increased indebtedness of consumers and higher interest rates. SBSA reported a Tier 1 ratio of 12.2% as of June 2014, while non-performing loans (NPLs) to gross loans declined to 3.5% in June 2014 from 3.7% in June 2013.
Absa Bank Limited
A key focal point of Moody's review of the expected impact of the challenging operating environment will be Absa's capital metrics, which are at the lower end of similarly rated global peers. The bank's common equity Tier 1 ratio declined to 10.1% in June 2014 from 12.2% in June 2013, following the payment of a sizeable interim dividend of ZAR8.5 billion in September 2013. The rating agency will also evaluate the sustainability of the improvement in the bank's credit loss ratio (annualised loan loss provisions to gross loans), which decreased to 1.1% in June 2014 from 1.3% in June 2013, and whether operating expenses growth (10% in H1 2014) will continue to outpace revenue growth (5% in H1 2014). Absa reported NPLs to gross loans of 4.3% in June 2014, down from 5.3% in June 2013, although this ratio continues to be the highest among its local peers.
FirstRand Bank Limited
In term of its review of FirstRand, Moody's will concentrate on a forward looking view the performance of the bank's asset-based financing arm (WesBank), where the credit loss ratio increased to 1.3% in December 2013 from 1.1% in December 2012, causing a 9% year-on-year decline in WesBank's six-months normalised earnings. The rating agency will also assess whether FirstRand's overall performance in the first six-months as of December 2013 (18% year-on-year increase in normalised earnings) is sustainable over the next 12-18 months. FirstRand reports the strongest capitalisation among the four largest South African banks, with a common equity Tier 1 ratio of 13.4% as of December 2013, in addition to the lowest level of NPLs to gross loans at 2.6%.
Nedbank Limited
In its review of the expected impact of the challenging operating environment, the rating agency will look into the sustainability of Nedbank's strong year-on-year growth of 24% in profit for the period H1 2014, and how the lower non-interest revenue is likely to affect the full-year results. Moody's will also examine the possible impact on Nedbank's capital ratios, in case the group decides in the second half of 2014 to exercise its rights to acquire up to 20% in Ecobank Transnational Incorporated (ETI), a bank with significant operations in the African continent. Nedbank reported a common equity Tier 1 ratio of 10% in June 2014, which is at the lower end of similarly rated global peers, as it places any excess capital at its holding company Nedbank Group Limited that reported a common equity Tier 1 ratio of 12.1% in June 2014, while NPLs were 2.8% of gross loans in June 2014.
Investec Bank Limited
As part of its review of the credit implications of the challenging operating environment for Investec, Moody's will pay particular attention to the sustainability of Investec's 14.5% increase in profit after tax during the year-ending March 2014. It will also focus on the evolution of its common equity Tier 1 ratio of 10.3% as of March 2014, which remains at the lower end of similarly rated global peers - although Moody's notes that it continues to report risk weightings on a more conservative standardised basis. In addition, Moody's will also assess the expected performance of the bank's private equity portfolio during the current economic slowdown and potential vulnerabilities of its high net-worth customer base. Investec reported gross NPLs to gross loans of 2.3% in March 2014, compared to 2.9% in March 2013.
WHAT COULD MOVE THE RATINGS UP/DOWN
The banks' ratings could be downgraded if Moody's considers that the currently challenging operating conditions will lead to a deterioration in the banks' earnings and capital metrics due to higher than expected loan loss provisions, and/or pressure in their funding and liquidity profiles. In addition, a deterioration in the creditworthiness of South Africa (Baa1 negative) could also exert downward pressure on the banks' ratings, in view of their sizeable holdings of sovereign debt securities. As indicated by the rating review for downgrade, there is limited likelihood of any upwards rating momentum over the near-term.
RATINGS AFFECTED BY TODAY'S ACTIONS
Standard Bank of South Africa
-- The local-currency long-term deposit rating has been downgraded to Baa1 from A3, and placed on review for downgrade.
-- The national-scale long-term deposit rating has been downgraded to Aa3.za from Aa2.za, and placed on review for downgrade.
The following ratings of the bank were also placed on review for downgrade:
-- The standalone bank financial strength rating (BFSR) of C-, equivalent to a baseline credit assessment (BCA) of baa1.
-- The foreign-currency deposit ratings of Baa1/P-2.
-- The local-currency short-term deposit rating of P-2, as well as the national-scale short-term deposit rating of P-1.za.
Standard Bank Group
-- The local-currency and foreign-currency issuer rating has been downgraded to Baa2 from Baa1, and placed on review for downgrade.
Absa Bank Limited
-- The local-currency long-term deposit rating has been downgraded to Baa1 from A3, and placed on review for downgrade.
-- The provisional foreign-currency senior unsecured EMTN programme rating has been downgraded to (P)Baa1 from (P)A3, and placed on review for downgrade.
-- The national-scale long-term deposit rating has been downgraded to Aa3.za from Aa2.za, and placed on review for downgrade.
The following ratings of the bank were also placed on review for downgrade:
-- The standalone bank financial strength rating (BFSR) of C-, equivalent to a baseline credit assessment (BCA) of baa1.
-- The foreign-currency deposit ratings of Baa1/P-2.
-- The local-currency short-term deposit rating of P-2, as well as the national-scale short-term deposit rating of P-1.za.
-- The provisional foreign-currency legacy subordinated rating of (P)Baa2, and junior subordinated EMTN programme rating of (P)Baa3
FirstRand Bank Limited
-- The local-currency long-term deposit rating has been downgraded to Baa1 from A3, and placed on review for downgrade.
-- The provisional foreign-currency senior unsecured EMTN programme rating has been downgraded to (P)Baa1 from (P)A3, and any issued foreign-currency senior unsecured debt has been downgraded to Baa1 from A3. Both ratings were placed on review for downgrade.
-- The provisional local-currency senior unsecured domestic MTN programme rating has been downgraded to (P)Baa1 from (P)A3, and placed on review for downgrade.
-- The national-scale long-term deposit rating and the national-scale senior unsecured programme rating have been downgraded to Aa3.za from Aa2.za, and placed on review for downgrade.
The following ratings of the bank were also placed on review for downgrade:
-- The standalone bank financial strength rating (BFSR) of C-, equivalent to a baseline credit assessment (BCA) of baa1.
-- The foreign-currency deposit ratings of Baa1/P-2.
-- The local-currency short-term deposit rating of P-2, as well as the national-scale short-term deposit rating of P-1.za.
-- The provisional short-term MTN programme rating of (P)P-2 and national-scale short-term rating of P-1.za.
-- The commercial paper rating of P-2.
-- The provisional local-currency junior subordinated MTN programme rating of (P)Baa3, as well as any issued local-currency legacy subordinated debt rated Baa2 and junior subordinated debt rated Baa3(hyb).
-- The national-scale ratings for legacy subordinated debt and junior subordinated debt of A1.za and A2.za respectively, and any issued national-scale junior subordinated debt rated A2.za(hyb).
-- The provisional local-currency Basel III-compliant subordinated debt ratings of the bank's domestic MTN programme of (P)Baa3, as well as any issued local-currency Basel III-compliant subordinated debt rated Baa3.
-- The national-scale ratings for Basel III-compliant subordinated debt of A2.za, and any issued national-scale Basel III-compliant subordinated debt rated A2.za.
Nedbank Limited
-- The local-currency long-term deposit rating has been downgraded to Baa1 from A3, and placed on review for downgrade.
-- The provisional foreign-currency senior unsecured EMTN programme has been downgraded to (P)Baa1 from (P)A3 and placed on review for downgrade.
-- The national-scale long-term deposit rating and the national-scale senior unsecured rating have been downgraded to Aa3.za from Aa2.za, and placed on review for downgrade.
The following ratings of the bank were also placed on review for downgrade:
-- The standalone bank financial strength rating (BFSR) of C-, equivalent to a baseline credit assessment (BCA) of baa1.
-- The foreign-currency deposit ratings of Baa1/P-2.
-- The local-currency short-term deposit rating of P-2, as well as the national-scale short-term deposit rating of P-1.za.
-- The provisional foreign-currency legacy subordinated EMTN programme rating of (P)Baa2, as well as any issued foreign-currency legacy subordinated debt rated Baa2.
-- The national-scale legacy subordinated debt rating of A1.za and the hybrid Tier 1 rating of A3.za(hyb).
Investec Bank Ltd
The following ratings of the bank were placed on review for downgrade:
-- The standalone bank financial strength rating (BFSR) of C-, equivalent to a baseline credit assessment (BCA) of baa1.
-- The local-currency and foreign-currency deposit ratings of Baa1/P-2.
-- The national-scale deposit ratings of Aa3.za/P-1.za.
-- The provisional foreign-currency senior unsecured EMTN programme rating of (P)Baa1, and any issued foreign currency senior unsecured debt rated Baa1. The provisional legacy subordinated programme rating of (P)Baa2.
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 ".mx" for Mexico. 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".
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Global Banks published in July 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
At the end of June 2014, Standard Bank Group had total assets of ZAR1,771 billion ($167 billion), Standard Bank of South Africa Limited had total assets of ZAR1,050 billion ($99 billion), Absa Bank Limited had total assets of ZAR811 billion ($76 billion), and Nedbank Limited had total assets of ZAR726 billion ($68 billion). At the end of March 2014, Investec Bank Limited had total assets of ZAR303 billion ($29 billion), and at the end of December 2013, FirstRand Bank Limited had total assets of ZAR798 billion ($76 billion). All banks are headquartered in Johannesburg, South Africa.
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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.
Statement issued by Moody's Investor Services, August 19 2014
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