African Bank Contagion Sweeps From Lenders to Sovereign
South Africa’s sovereign rating is at risk of becoming another casualty of African Bank Investment Ltd.’s (ABL) failure, which has already resulted in a downgrade for other lenders, investor losses and canceled bond sales.
Moody’s Investors Service’s decision to lower the creditworthiness of the biggest South African lenders may bring forward a sovereign-debt reduction, Standard Bank Group Ltd. said yesterday. The cut will raise borrowing costs for banks and result in more stringent lending criteria, lifting finance costs for other companies and consumers, according to Atlantic Asset Management, which oversees the equivalent of $421 million.
“If the bank environment is deteriorating because of poorer economic growth, then the same will go for the South African government, because tax revenues will be under pressure,” Kokkie Kooyman, who helps manage more than $700 million as head of Sanlam Global Investments in Cape Town, said by phone Aug. 20. “The sovereign debt must be under threat.”
Money-market funds including those run by Cadiz Asset Management, Stanlib Ltd. and Barclays Plc’s Absa imposed losses on investors after the central bank placed African Bank under administration on Aug. 10. Since then, Toyota South Africa (Pty) Ltd., the nation’s top automobile dealer, and Bayerische Motoren Werke AG’s local unit canceled bond sales, citing lack of investor appetite in the wake of the collapse of the country’s biggest provider of unsecured loans.
Moody’s on Aug. 19 cut the local-currency debt of Standard Bank (SBK), FirstRand Ltd. (FSR), Absa and Nedbank Group Ltd. (NED) and kept them on review for more reductions. The ratings company lowered South Africa’s rating in September 2012 by one level to Baa1, the third-lowest investment grade, with a negative outlook.
Downgrading the banks was unwarranted as they are well-capitalized and have relatively low loan-to-deposit ratios, said Ryan Wibberley, head of dealing for frontier and emerging markets at Investec Asset Management, which oversees about $123 billion.
“A lot of people will attribute it to a knee-jerk reaction to African Bank,” Wibberley said by phone from Cape Town yesterday. “The outlook is not all that bad.”
Standard Bank, Africa’s largest lender, reported a 2 percent increase in first-half net income this month, while Old Mutual Plc’s Nedbank announced an 18 percent increase, boosted by a drop in bad-loan charges. Barclays Africa Group (BGA) lifted profit 10 percent in the first six months as earnings outside South Africa rose. FirstRand, the second-largest lender, reports fiscal full-year earnings next month.
The South African Reserve Bank stepped in to save African Bank, which also owns a furniture retailer, after its share price plunged 95 percent as the company said it will post a record loss and needs at least 8.5 billion rand ($795 million) of capital. The rescue included a 10 percent impairment of African Bank’s senior and wholesale debt, a move Moody’s said suggests authorities won’t fully protect creditors.
“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,” Moody’s said. The rating review also reflected concerns over weak economic growth and consumer indebtedness, Moody’s said.
The local-currency deposit ratings of Standard Bank, FirstRand, Nedbank and Absa were cut one level to Baa1 from A3. Standard Bank’s issuer rating was lowered to Baa2 from Baa1, while all ratings, including those of Investec Ltd. (INL), were put on review for downgrade, the company said.
While the downgrades were a “rational” response to the central bank’s decision to impose losses on holders of African Bank’s debt, they will reverberate through the economy, said Arno Lawrenz, chief investment officer at Cape Town-based Atlantic Asset Management. South Africa’s economy contracted in the first quarter for the first time since the 2009 recession.
“This doesn’t just impact the banks themselves, but also the general cost of credit for corporates,” Lawrenz said by phone yesterday. “A general tightening of credit conditions or lending standards is probably at the back of the minds of the credit committees of all of these banks.”
The nation’s banking industry remains healthy and robust, with an average capital adequacy of 14.9 percent, impaired loans equal to 3.57 percent of credit and a return on equity of 14.3 percent, the central bank said in a statement on its website yesterday. Moody’s concern of a lack of support “stands in sharp contrast to the support actually provided” to African Bank, the Pretoria-based regulator said.
Standard & Poor’s has no immediate plans to downgrade the lenders as it doesn’t take into account government support in its assessments, Associate Director Matthew Pirnie said by phone from Johannesburg. S&P cut South Africa one notch to BBB-, its lowest investment grade, on June 13, with a stable outlook. Fitch Ratings, which assesses South Africa’s debt as BBB, the second-lowest investment grade, revised its outlook to negative from stable the same day.
The rand gained 0.4 percent to 10.70 per dollar by 2:25 p.m. in Johannesburg after falling the most in two weeks yesterday. The cost to protect against non-payment of the nation’s dollar debt for five years using credit-default swaps climbed five basis points to 181 yesterday, while the seven-member FTSE/JSE Africa Banks Index declined 1.4 percent to the lowest since July 10. The gauge was up 1.2 percent today.
While the Reserve Bank acted quickly to avoid systemic risk in South Africa’s first bank failure in 12 years, its imposition of losses on bondholders set a precedent for the way it may handle future rescues, said Peter Attard Montalto, a London-based emerging-market economist at Nomura International Plc.
“The change in Moody’s ratings reflects a new view on the response function of the SARB to the financial sector in times of stress, and as such was justified,” he said in an e-mailed note yesterday. “Other agencies may well follow suit.”
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