Moody’s South Africa Bank Downgrade Raising Sovereign RiskRobert Brand
Moody’s Investors Service’s downgrade of South Africa’s biggest lenders raises the risk the nation’s sovereign debt rating may be cut, Standard Bank Group Ltd. said.
“The action on the banking system by Moody’s could move forward a potential negative rating action on the sovereign,” Asher Lipson, head of fixed-income strategy at Standard Bank Group Ltd. in Johannesburg, wrote in a client note today. Before the downgrade, the rating company regarded South Africa’s banking system as a credit strength for the sovereign, he said.
Moody’s yesterday cut the local-currency debt of lenders including Standard Bank and FirstRand Ltd., and kept them on review for more reductions after the collapse of African Bank Investments Ltd., the country’s largest provider of unsecured loans. South Africa’s sovereign rating was lowered one level to Baa1 in September 2012, the third-lowest investment grade, with a negative outlook since November 2011. That’s two levels higher than Standard & Poor’s and one higher than Fitch Ratings.
The local-currency deposit ratings of Standard Bank, FirstRand, Nedbank Group Ltd. and Barclays Plc’s Absa unit were cut one level to Baa1 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 rand declined 0.5 percent to 10.6985 per dollar by 3:47 p.m. in Johannesburg, while the cost to protect against default of the nation’s dollar debt for five years using credit-default swaps climbed five basis points to 181. The seven-member FTSE/JSE Africa Banks Index fell as much as 2.5 percent to its lowest intraday level since July 10.
“The downgrade of the banks will have factored” in the currency’s move, Mohammed Nalla, head of strategic research at Nedbank, said by phone from Cape Town. “It is causing some concern,” even though a sovereign downgrade by Moody’s would be no surprise, given its rating is higher than S&P and Fitch, he said.
The South African Reserve Bank placed African Bank, which also owns a furniture retailer, into administration on Aug. 10 after it reported a record loss and said it needed 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 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 Reserve Bank disagreed with Moody’s decision, it said in a statement on its website, reiterating comments it made after the ratings company downgraded Capitec Bank Holdings Ltd. 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.
The downgrade is likely to raise the cost of capital for South African lenders, said Arno Lawrenz, chief investment office at Cape Town-based Atlantic Asset Management, which manages the equivalent of $421 million. The lower assessment was “rational” because it reflected the likelihood of losses to bondholders in the event of a default, he said.
“Borrowing costs will be affected without a doubt,” Lawrenz said by phone. “If you are a funder of any of these banks, what you have to take into account is the possibility that you could suffer a haircut if the worst-case scenario unfolds.”