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Cape Town - Events surrounding the bail-out of African Bank have already led to the next episode of this banking drama, said George Herman, Citadel's senior investment strategist.
First hit was Capitec, which was downgraded because it too operates in the micro-lending business catering to lower income groups.
The bank objected to the downgrade saying its business model was different, that it has a different funding structure and its loan books aren’t as toxic as that of African Bank.
In light of this the South African Reserve Bank (Sarb) made a public announcement condemning Capitec’s credit downgrade, in support of the bank and the entire South African banking system.
Sarb stated that total banking impaired advances are currently 3.57% while banks’ capital adequacy stands at 14.87% and that as such there is no reason for panic.
Despite these protestations, Moody’s went one step further on Tuesday by downgrading all four major South African banks and placing them on negative outlook.
Herman looks at the issues at play
Firstly, the macro-economic backdrop for the low income consumer in South Africa has been tough and has been getting worse over the past year.
Tailwinds that this consumer segment experienced over the last five years have now turned into headwinds, placing much strain on the sector’s discretionary income.
This slowdown in consumption places strain on many sectors including banking, retail and other domestic consumer discretionary industries.
The second issue is that rating agencies have been criticised heavily since 2008 about being "behind the curve" and that they only ring the bell after the house has burnt down.
This is highlighted by the fact that African Bank hadn’t been downgraded prior to being placed under curatorship and had a A-rating at the time.
Rating agencies now want to get pro-active and disprove this allegation.
"The problem is that by these actions, they cause systemic uncertainty in an economy that is already staggering under severe growth impediments," said Herman.
"The last thing South Africa needs right now is a decrease in investor sentiment and a decline in foreign investment."
In his view the question has to be whether rating agencies are qualified specialists that keep a watchful eye over risky entities or have they become the entities that induce risk into the system?
"The fact is that the macro-economic landscape in South Africa has been deteriorating and that the consumer’s ability to spend, especially on credit, has been severely reduced," said Herman.
"It’s also known that the South African banking sector is well capitalised and not overly exposed to any single segment that would have the ability to destabilise the entire system."
In his view Sarb’s actions also point to a central bank that has total control over the South African banking system, which should give investors more certainty, "rather than the rating agencies’ current dim view of all South African banks".
"Citadel remains confident that South Africa has a world-class banking system. We will continue to keep an eye on the sector," said Herman.
- Fin24
