Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) and Viability Ratings (VRs) of five South African banks – Absa Bank Limited, FirstRand Bank Limited, Investec Bank Limited, Nedbank Limited and The Standard Bank of South Africa Limited – to ‘BB’ and ‘bb’, respectively. The Outlook on all the IDRs is Negative.
Fitch has taken similar rating actions on the Long-Term IDRs and VRs of four South African bank holding companies, namely Absa Group Limited, Investec Limited, Nedbank Group Limited and Standard Bank Group Limited. All National Long-Term Ratings and debt ratings (where applicable) have also been downgraded. The Outlook on the National Long-Term Ratings is revised to Negative from Stable.
The rating action is driven by the expected negative impact from the coronavirus outbreak on the banks’ operating environment and key financial metrics, notwithstanding uncertainty as to the full economic and financial market implications.
We believe the South African operating environment is particularly exposed to the pandemic because of its highly dense and vulnerable communities, and heightened macro-economic risk from falling commodity prices, disruption to tourism, mining activity and manufacturing, as well as pressure on the country’s public finances.
The 21-day ‘lockdown’ that started on March 27 will deliver a further large negative shock to the banks’ operating environment, which was already affected by the country’s very weak economic outlook. Downside risks could extend beyond this, given the risk of a prolongation of the crisis and South Africa’s reliance on global export markets.
Fitch expects South African banks to face multiple challenges in the near team, including a decline in client activity, lower interest rates, which will put pressure on margins, and rising credit losses. These factors will increase risks to banks’ earnings, asset quality and capitalisation. Debt-relief measures announced by banks will not only affect margins but also mask the extent of asset-quality deterioration.
The South African Reserve Bank (SARB) recently cut the repo rate by 100bp to 5.25% and announced a range of additional liquidity support measures, including government bond purchases in the secondary market, to increase market liquidity. Further measures from the SARB, including the relaxation of bank rules to ensure the flow of credit into the economy, are likely.
Fitch had already anticipated a more challenging year for banks in 2020 – as reflected in its Negative 2020 sector outlook – mainly due to weak GDP growth. Our expectations of earnings and asset-quality weakening for 2020 now far exceed what was contemplated in late 2019 when we published our outlook.
The first-order effects on banks’ asset quality will mainly come from households and businesses with more exposure to industries and asset classes affected by the coronavirus, and these stressed loans may not be visible before banks’ 2020 first-half results are published. The second-order effects will come from both households and SMEs due to the weaker growth outlook, and will largely depend on the duration and severity of the crisis. We expect prime corporates to have adequate buffers to absorb shocks, at least into 2021.
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