Banks to 'BB-'/Negative

Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) 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' from 'BB' and Viability Ratings (VRs) to 'bb-' from 'bb'. The Outlook on all IDRs is Negative.

Fitch has also downgraded the Long-Term IDRs and VRs of four South African bank holding companies Absa Group Limited, Investec Limited, Nedbank Group Limited and Standard Bank Group Limited. All debt ratings on the international scale have also been downgraded by one notch.

The rating actions follow Fitch's downgrade of the sovereign's LongTerm IDRs to ' BB-' from ' BB' on 20 November 2020 (see: Fitch Downgrades South Africa to 'BB-'; Outlook Negative at www.fitchratings.com). Fitch considers that the South African banks cannot be rated above the South African sovereign given the high concentration of their activities within South Africa and significant sovereign exposure (dominated by government debt but also includes that of public-sector corporates) ranging between 175% and 245% of the banks' capital at end-June 2020.

The Negative Outlooks on

the banks'/groups' Long-Term IDRs are aligned with the Negative Outlook on the sovereign rating.

Fitch has also downgraded the five banks' Support Ratings (SR) to ' 4' from '3' and revised their Support Rating Floors (SRF) down to ' B+' from ' BB-'. This reflects the sovereign's reduced ability to provide support, in case of need, due to a weakening fiscal position.

The National Ratings, including those assigned to senior unsecured and Tier 2 debt issues, are unaffected by this rating action.

The Long-Term IDRs of all South African banks are driven by their standalone creditworthiness, as defined by their VRs. The banks' ratings are highly influenced by Fitch's assessment of South Africa's operating environment and the banks' capitalisation and leverage, which are highly sensitive to adverse changes in the sovereign's credit profile, as Fitch believes it is unlikely that the banks would remain solvent following a sovereign default.

The pandemic has severely hit South Africa's economic growth performance, pressuring the banks' asset quality and earnings. Fitch expects GDP will contract by 7.3% in 2020, and recover to 4.8% in 2021 given base effects. We believe that trend GDP growth will remain around 1.5%, and there are risks that lasting effects of the pandemic could further weigh on growth.

Asset quality weakened as a result of the coronavirus shock on the already weak operating environment, as highlighted by an increase in the sector's impaired loans ratio to 5.0% at end3Q20 from 3.9% at end-2019. We expect the sector's impaired loans ratio to rise further to our guided range of 6%-8% by end-2021 with the unwinding of debt relief measures, rising unemployment and a very challenging business environment.

As expected, credit losses surged in 1H20 due to conservative provisioning in response to the coronavirus pandemic. However, banks were able to absorb this through solid pre-impairment operating profit. Profitability will recover in 2021 as the pace of provisioning slows, but a recovery to pre-pandemic levels will not occur before 2022. This is because lower interest rates will squeeze margins, loan impairment charges will remain elevated and subdued demand given the slow economic recovery will stifle revenue generation.

Capital ratios continue to display comfortable buffers over regulatory requirements and are expected to remain broadly stable despite current pressures on asset quality and earnings. The sector's common equity Tier 1 ratio was 12.3% at end-3Q20 compared with 12.7% at end-2019. However, our assessment of capitalisation and leverage is constrained at the level of the sovereign rating because of very high exposure to the sovereign (including government and public sector debt securities and loans to the public sector).