Southern Africa: Moody's Downgrades SA Banks Too

26 November 2020

Credit-rating agency Moody's Investors Service yesterday downgraded five South African banks on the backdrop of the recent downgrade of the country's status.

Last week, Moody's downgraded the country deeper into junk status, further crippling its ability to attract money and fund its expansionary budget.

It is normal practice that when rating agencies downgrade a sovereign state, major businesses that operate in that country are also downgraded.

The five banks are Standard Bank of South Africa Limited, FirstRand Bank Limited, Absa Bank Limited, Nedbank Limited, and Investec Bank Ltd, as well as holding companies Standard Bank Group Limited the Absa Group Limited.

Moody's also says it will maintain a negative outlook on the above seven entities.

In its commentary on the banks, Moody's said the weakening in the sovereign credit profile of South Africa, has direct implications on the banks, as they hold significant sovereign securities on their balance sheets, and the gradual weakening of the banks' standalone credit profiles, as Covid-19 exacerbates an already challenging operating environment.

"The big five South African banks' direct and indirect exposure to the sovereign (including loans to state-related entities) increased to 200% of their combined capital base as of June 2020, from 176% as of December 2019," said Moody's.

Moody's further said it expects the banks' asset quality to deteriorate materially, as systemwide problem loans over gross loans have already increased to 5% in September 2020 from 3,9% in December 2019, with further deterioration expected over the next 12 months .

"Profitability also remains under pressure with the systemwide return on assets declining to 0,62% during the 12 months ending September 2020 compared to 1,2% in 2019, as a result of increasing provisioning," said the agency.

On a positive note, the agency said South African banks will continue to maintain solid capital buffers, along with sound funding and liquidity, and gross loans-to-deposit ratio was healthy at 89%, and liquidity coverage ratio at 147,4%, as of September 2020.

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