South Africa’s banking index slid to a five-week low after Moody’s Investors Service cut the biggest lenders’ local-currency debt ratings and kept them on review for more reductions after African Bank Investments Ltd.’s (ABL) collapse.
The seven-member FTSE/JSE Africa Banks Index declined 2.3 percent to 64720.07 points, its lowest intraday level since July 10. Standard Bank Group Ltd. (SBK) fell about 3 percent, while FirstRand Ltd. (FSR) and Barclays Africa Group Ltd. (BGA) both declined about 2 percent as of 1:28 p.m. in Johannesburg.
The local-currency deposit ratings of Standard, FirstRand, Nedbank and Absa Bank Ltd., a unit of Barclays Plc (BARC), were cut one level to Baa1, the third-lowest investment grade, from A3, Moody’s said yesterday in a statement. Standard Bank’s issuer rating was lowered to Baa2 from Baa1, while all ratings, including Investec Ltd.’s, were put on review for downgrade.
The South African Reserve Bank placed African Bank, an unsecured lender, into administration on Aug. 10 after it reported a record loss and said it needed at least 8.5 billion rand ($800 million) of capital. The rescue included a 10 percent impairment of African Bank’s senior and wholesale debt, a move that Moody’s said suggested South African authorities won’t fully protect creditors in the case of a bank failure.
The central bank’s response, while helping contain the risk of contagion, “indicates the regulator’s willingness to impose losses on creditors,” Moody’s said. “This needs to be reflected in Moody’s ratings, as debt ratings speak to both the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default.”
The central bank, in a statement on its website, said it disagreed with Moody’s decision, reiterating comments it made after the ratings company downgraded Capitec Bank Holdings Ltd. (CPI) late last week. Moody’s concern that the bank won’t provide systemic support after the African Bank rescue “stands in sharp contrast to the support actually provided by the SARB,” the Pretoria-based regulator said.
African Bank is being split into a good and bad bank under the terms of a rescue engineered by the regulator. A group of lenders agreed to underwrite a 10 billion rand capital raising for the good bank, with the Reserve Bank paying 7 billion rand for the lender’s 17-billion rand soured loan book.
The larger South African lenders source most of their funding locally and the downgrade probably won’t have a “material impact on their cost of funding and on their operations,” Jean Pierre Verster, an analyst at 36ONE Asset Management, said by phone from Johannesburg. “It might have a short-term negative impact on sentiment” with the shares coming under some pressure, he said.
Absa, FirstRand and Nedbank’s senior unsecured debt was also cut one level by Moody’s to Baa1.
“The biggest four financial institutions in South Africa represent an entirely different business model to the institution that was recently placed under curatorship,” Razia Khan, head of Africa research at Standard Chartered Plc, said in an e-mailed note yesterday. “The placing of African Bank under curatorship does not necessarily set a precedent for any new situation that may arise with any other financial situation. To assume this would be wrong.”
Capitec, which is African Bank’s closest competitor, was cut two levels to Ba2 from Baa3, with the potential for further downgrades, Moody’s said Aug. 15. Moody’s shouldn’t assume the central bank won’t step in to back other financial institutions, the central bank said in a statement at the time.
Standard Bank said by e-mail that the country’s banking industry remains strong and that there is no indication other lenders have been affected negatively by the failure of African Bank. Absa said the ratings downgrade wasn’t specific to the company and that the country’s banking industry remains healthy.