Banks play down cost of downgrade
• S&P cuts rating of SA’s financial institutions • Analysts say costs to be passed on to borrowers
Most of the banking sector does not expect S&P Global Ratings’s decision on Thursday to downgrade ratings at SA’s leading banks to affect their cost of funding or disrupt operations significantly, even as analysts warned that funding costs would increase markedly and that these costs would be passed on to consumers over time.
The ratings agency has brought the counterparty credit ratings of FirstRand Bank, Nedbank, Investec Bank and Absa in line with government’s foreign-currency rating of BB+, the first rung in the noninvestment grade basket. They all had a negative outlook.
S&P does not rate Standard Bank or Capitec Bank.
“[The ratings] reflect that of the sovereign and indicate that we could lower the ratings further if we lower our foreigncurrency ratings on SA,” said S&P analysts.
Counterparty credit ratings measure the probability of default on banks’ counterparty obligations, such as funding commitments, letters of credit, secured transactions and other obligations arising from running the operations of a bank.
SA’s local-currency rating was unchanged at investment grade, while the country’s foreign-currency rating was downgraded to subinvestment status in line with the downgrade of SA’s sovereign debt.
Arqaam Capital analyst Mohamed El Khalouki said he expected the sovereign down- grade to “naturally” increase funding costs for the banks. He said the costs would be passed on to borrowers over time, mainly at Capitec and Barclays Africa, which had a “high dependency” on wholesale funding.
El Khalouki said he had noted sharp increases in bond yields over the past week, which he saw reducing net interest margins by up to 6.5 basis points. “The bonds yields of Capitec and Barclays Africa rose about 33 basis points since last week, while we didn’t see major changes for Nedbank, Standard Bank and FirstRand,” he said.
FirstRand group treasurer Andries du Toit said the ratings
were very important for banks. “Foreign currency ratings give South African banks the ability to gain access to the international derivative market to hedge risk on behalf of customers and to gain access to international funding markets.
“A downgrade means this funding becomes scarcer and more expensive. This increase in cost is transmitted to borrowers,” he said.
Du Toit said FirstRand’s cost of borrowing from local financial institutions had already risen five basis points to 10 basis points, while the cost of funding from foreign lenders had surged about 50 basis points.
“Because banks are financial intermediaries, the sector reprices to the consumer immediately,” he said.
Du Toit said that if banks struggled to gain access to funding, this would hamper their ability to provide credit for capital formation and broader credit extensions. Nedbank had not responded by the time of publication.
Ursula Nobrega, spokesman for Investec — which is dual listed in Johannesburg and London — said that the downgrade affected its South African bank, which mainly held deposits in rands.
“The downgrade of the country’s foreign currency rating is not an indication of an entity’s ability to pay back local currency [rand-denominated] debt,” she said.
“S&P have still afforded SA a long-term national scale rating of zaAA-, which provides an indication that the bank is able to pay back rand-denominated debt and meet the obligations of local depositors.”
Nobrega said Investec’s South African bank did not rely on foreign sources to fund its core loan book.
“This will have an immaterial impact on the bank’s overall cost of funding,” she said.
Absa also did not expect any material increases to its cost of funding for the same reasons.
“A more material impact would be due to a higher repo rate if the South African Reserve Bank were to hike interest rates to control inflation,” said group treasurer Deon Raju.
The Reserve Bank said South African banks were adequately capitalised to deal with the ratings cut. It said the banks had passed a stringent stress test in 2016, including a macroeconomic scenario, involving excessive volatility in financial markets, and risk aversion.
INVESTEC’S SOUTH AFRICAN BANK DID NOT RELY ON FOREIGN SOURCES TO FUND ITS CORE LOAN BOOK