South African Banks Drop Most in 14 Years as Zuma Fires Nene

  • FirstRand falls 15% as Barclays unit, Standard Bank tumble
  • President Zuma hands little-known lawmaker finance role

South Africa’s banking index plummeted by the most since October 2001, wiping out $8.6 billion in share value, after President Jacob Zuma fired Finance Minister Nhlanhla Nene and replaced him with a little-known lawmaker.

The industry benchmark fell 14 percent by the close in Johannesburg. FirstRand Ltd., Africa’s largest bank by market value, fell by 15 percent, the most on record, while Standard Bank Group Ltd., the biggest by assets, dropped 14 percent. Barclays Plc’s South African unit slumped 15 percent and Nedbank Group Ltd. retreated 11 percent.

“All the banks are built on confidence -- removing the finance minister isn’t good for the country’s confidence,” said Patrice Rassou, head of equities at Sanlam Investment Management in Cape Town, which oversees about $30 billion in assets.

Zuma late Wednesday removed Nene from his post after 19 months, without giving any reasons and said he would be switched to another key role. David van Rooyen was sworn in as the new minister Thursday at a ceremony in Pretoria. The rand dropped as much as 5.4 percent against the dollar after Zuma’s announcement, the biggest decline since September 2011, hitting a record low of 15.3857.

The announcement came less than a week after credit rating companies pushed the nation closer to junk status, citing concern over a sluggish economy and rising debt as inflation and interest rates climb. Mining and manufacturing are already under strain because of plunging metal prices and power constraints.

“A debt downgrade would also lead to increasing funding costs which is not good for banks, corporate South Africa and the man on the street who is already over-indebted,” Sanlam’s Rassou said.

Insurers Hit

Other financial services companies also felt the impact, with Johannesburg’s benchmark life assurance index losing 9.1 percent, the most in 18 years. Sanlam Ltd., the largest South African-based life assurer, plunged 11 percent, the biggest drop on record. Old Mutual Plc, which relies on South Africa for more than half its profit, slid 7.6 percent, the most in more than three and a half years.

Investors may be concerned that the risk of rising bad debts is increasing, said David Shapiro, a director at Johannesburg-based money manager Sasfin Securities. “Are the banks lending to an economy that perhaps can’t handle it?” he said by phone. “You’d expect rising debt levels as inflation surges.”

The sell-off in banks could be a sign that foreign investors are pulling funds out of the South African market, Shapiro said. “They are being used as punching bags,” he said. “The banks are the ones lending to the manufacturers and miners.”

Investec Ltd. fell 3.6 percent, while Capitec Bank Holdings Ltd., which provides unsecured loans, dropped 11 percent, the most since October 2003. Combined, the bank index lost 130 billion rand ($8.6 billion) in market value.

‘Very Concerning’

The removal of Nene is “very concerning” and his replacement “has no experience in the area of finance, economics and global financial dynamics,” the Banking Association of South Africa said in a statement. “Our country and international investors need a degree of certainty that Minister Nene’s policy trajectory and actions will continue.”

The Association for Savings and Investment South Africa, made up of institutional investors with 8.5 trillion rand in assets under management, said Nene’s removal was “of grave concern.” The organization wants an urgent meeting with Zuma and Van Rooyen to seek assurances that “fiscal discipline will remain the priority.”

Rene van Wyk, the head of bank regulation in South Africa, declined to comment on the stock declines and referred questions to the central bank’s media department.

News of Nene’s dismissal caused yields on government rand-denominated debt due December 2026 to jump to the highest since July 2008. Bank bonds tend to move in lockstep with the sovereign debt. While all of South Africa’s biggest lenders issue debt regularly, none of them rely solely on the bond market for their funding.

South Africa’s four biggest banks showed a loan-to-deposit ratio, calculated by dividing total deposits by total banking-book assets, of 96.6 percent by the end of June, according to a September report from PricewaterhouseCoopers LLP.

Household Debt

Standard & Poor’s lowered its outlook to negative from stable on FirstRand, Nedbank, Standard Bank, Investec and Capitec on Wednesday, before Zuma’s announcement. Slow economic growth, low commodity prices, electricity shortages, rising inflation, climbing interest rates and swelling household debt were some of the reasons S&P gave for its decision.

“Investors are now more worried about a downgrade to junk status,” Wayne McCurrie, who helps manage 170 billion rand at MMI Group, said by phone. “In South Africa, you just never know what’s coming. This increases uncertainty and the new finance minister is mostly unknown.

“The banks are the cheap part of the market,” he said. “It just shows that being cheap doesn’t help when sentiment turns.”

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