FirstRand warning 'doesn't alarm'

Johannesburg - Rating agency Standard & Poor's (S&P) is not yet looking to downgrade South African banks, despite a profit warning from FirstRand earlier this week.

FirstRand warned on Tuesday that continued bad debts in its mortgage book and trading operation losses were having a negative impact on its business. In November, the bank's operating outlook was downgraded from "stable" to "negative", because of the challenging operating environment facing South African banks.

"Investors do not want to see you acting prematurely or too late as a ratings agency," said Konrad Reuss, head of S&P in South Africa, in a presentation on Thursday. He said that premature action would be "unhelpful" to investors at this point.

Reuss was responding to a Fin24.com query on whether rating agencies could be more proactive in the way they inform the market on outlook and ratings changes.

Agencies under the microscope

Rating agencies have come in for a great deal of criticism over the last year.

Investors and market participants have been highly critical of the way these agencies have rated debt instruments, particularly those in the US housing market, which have subsequently been blamed for many of the problems facing world financial markets.

Locally, S&P came under fire for its downgrades of the outlook for local banks as well as the South African sovereign rating in November. The National Treasury, a client of S&P, felt that rating agencies were not in touch with what was happening in the local environment and the downgrade was not justified.

In response to the criticism, Reuss said: "Yes, we accept that we had to change certain assumptions [for the models used in the US housing debt instrument market], but we believe that rating agencies remain good indicators of relative default."

Good management

Despite the change in outlook ratings for certain SA banks, including FirstRand, Reuss believes that the banks will weather the storm.

He said: "Managers of banks here in South Africa have a good idea of what is happening both locally and abroad. Banks here are strong, well-managed and well-supervised."

With both FirstRand and Sanlam reporting a tough business climate, rating agencies are having to look closely at the financial sector.

When a rating agency suspects that the operating environment for an institution is likely to change, it will initially change the "outlook" for the business before making a change in the "rating". A change in the rating may affect the ability of an organisation to obtain cheaper financing, or increase the levels of capital an institution may be required to carry.

While not passing judgment or making any recommendations on the ratings of SA banks, including FirstRand, Reuss did say: "Having looked at our ratings transition stats, in the majority of cases, the outlook change becomes a rating change."

- Fin24.com