SA banks prepare for the worst

Banks are preparing for the worst when it comes to the threat of another downgrade of SA’s debt.

The credit ratings of large lenders like Standard Bank, Barclays Africa, Nedbank and FirstRand are inextricably tied to that of SA, where they make most of their profit. Banks also need to hold sovereign bonds for regulatory purposes, so any increase in government’s borrowing costs im- mediately causes the capital the firms need to support lending to become more expensive.

“FirstRand anticipated the downgrades since 2015 and has been working on a number of proactive strategies to mitigate the impact,” said FirstRand’s Andries du Toit. These include adjusting credit origination, and boosting liquidity and capital buffers.

Pending reviews

At stake for lenders is the credit assessment on SA’s local-currency bonds, which account for 90% of government’s issued debt. S&P and Moody’s – both due to announce their latest reviews on November 24 – still rate rand-denominated debt as investment grade.

A change in either evaluation could see SA removed from some indexes tracked by global investors, triggering outflows and pushing up borrowing costs. While the ratings companies could wait until after the ANC’s December conference, they may be swayed to act sooner after Treasury said the budget deficit will widen and debt levels will climb.

“Banks are cyclical investments so will be impacted by any downturn as a result of a sovereign downgrade and the resultant impact on the economy and our clients,” said Nedbank’s Mike Davis. “We have, however, been aware of this risk for a long while and are well prepared for such an event should it happen.” –Bloomberg