State’s weak credit profile behind banks’ downgrade

MOODY’S Investor Services pointed to a weakening government credit profile – leading to its reduced capacity to provide support to banks in case of need – when it downgraded the five largest South African banks on Monday night with a negative outlook.

Moody’s downgraded the long-term local and foreign-currency deposit ratings of the five banks from one notch above investment grade to Baa3 with a negative outlook from Baa2.

The downgraded banks are Standard Bank, FirstRand, Absa, Nedbank and Investec.

The primary driver for rating downgrades was the challenging operating environment, characterised by a pronounced economic slowdown, and weakening institutional strength, Moody’s said.

It downgraded South Africa’s sovereign credit rating last week and assigned a negative outlook. It expected 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, Moody’s said.

The economy last week entered a recession for the first time since 2009, after growth contracted by 0.7% in the first quarter of the year.

Moody’s said these challenging economic conditions, combined with potentially weaker investor confidence, volatility in asset prices and higher funding costs would likely pressure banks’ earnings and asset quality metrics, 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, linked their credit profile to that of the government.

The negative outlook was primarily linked to that of the sovereign rating, driven by the weak economic environment. – African News Agency