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Bank downgrades: Sarb misses the point

Johannesburg - Although the downgrades of SA banks are technically justified, it is still important to separate downgrades from the health of the banking system and the South African Reserve Bank's (Sarb’s) commitment to financial stability, according to Nomura's emerging markets economist Peter Attard Montalto.

"The market is taking some time to digest the SA Reserve Bank (Sarb) enforced restructuring of African Bank Investments [JSE:ABL] and its wider implications for the financial system," he said.

He regards the downgrades of Capitec, followed by that of Standard Bank, FirstRand, Nedbank and Absa, also putting them on review for further downgrades, as the aftershocks of the regulators’ decisions on how to treat Abil.

Investec was not downgraded, but was also put on review.

"Further banking sector downgrades from other agencies are possible, but we do not think this adds to the downward bias on sovereign ratings," he said.

"This is because of the view on senior bank debt loss potential given Sarb's commitment to financial stability, which we and the ratings agencies do not see as diminished."

READ: Banking downgrade in perspective

Greater transparency needed

Montalto said much greater transparency is needed from the regulators - and the curator PwC - on Abil’s technicalities and on banking sector support policies in particular to calm the markets.

"Until then market concerns are likely to continue, though are still at only moderate levels," he said.

The downgrades led to an unusual response by Sarb in two separate, similar statements. It suggested that the downgrades were at odds with the support it provided to Abil through putting it in curatorship and splitting out the bad book.

READ: Why African Bank was a "perfect storm"

"However, we believe this misses the point. The downgrades were because Sarb’s support was less than Moody’s had originally factored in. We think the senior debt bail-in is ultimately what triggered this view," said Montalto.

"Put simply, we think it is Sarb’s responsibility to backstop financial stability – and that does not necessarily mean bailing-out senior debt holders. The SARB’s commitment to financial stability is unquestioned."

Therefore, he thinks the change in Moody’s ratings reflects a new view on the response function of Sarb to the financial sector in times of stress and is as such was justified.

"While it is true that the Sarb continues to stress publically and privately that it will respond to each banking distress situation on its own merits and in different ways, Abil was the first bank distress case for some 12 years – the first one since 2008 with the new global move towards bank resolution regimes coordinated at the G20 level," explained Montalto.

"As such the move by Sarb over Abil provides important new information about Sarb’s willingness to apply losses to more senior tranches of debt when possible, while still maintaining overall financial stability."

He calls this the revealed preference of regulators.

"However, we think it does not preclude Sarb from acting in a different way in the future, but to assume there is no information in what has happened would be quite wrong," he said.

So if Capitec were in the same position with a greater proportion of retail deposits to protect Sarb could well have to apply a similar haircut to senior debt, while also providing proportionally more cash support to secure those deposits.

"We think other agencies may well follow suit. Though, some like S&P have already been more cautious on the shape of the SA bank recovery regime, not factoring in the likelihood of an uplift for senior credit support. So it is more marginal if it will shift," he said.

The shift in the banking sector view has no mechanical pass-through to sovereign ratings for the agencies, but a view on financial stability is a contributing factor.

"However, we do not believe that Moody’s or other agencies will downgrade their view of Sarb’s commitment to financial stability and we do not see this action contributing to sovereign downgrades," he said.

"That said, we think issues such as Eskom shareholder support and overall growth levels are a much bigger downside drag to the rating, though that is hardly a new story."

More concrete guidance needed
 
In Montalto's view the Abil issue highlights the need for Treasury, the Financial Services Board (FSB) and Sarb to provide more concrete guidance on resolution regimes.

S&P highlighted this uncertainty in a recent report.

Montalto remains concerned about the handling of the technicalities of the Abil action by PwC and the company itself.

"There has been no official information published since Sarb’s action on August 10 to provide clarity and transparency, despite PwC’s involvement several months before the event, equally there has been no response to communications," he said.

Capitec view

Montalto still believes that Capitec is very different to African Bank. Capitec has a wider range of business lines and a much more risk-averse loan extension with risk management practice.

"Capitec's business is also expanding much more rapidly and it is the only South African bank already Basel III compliant," said Montalto.

"There is little Capitec can do here, except continue communicating how it is different. It is exposed to the risky unsecured debt market, but the way it has handled it is very different from Abil."

This means it is still not a systemic risk through its debt or through deposits, because of the provisioning policies already in place.

READ: Business as usual at Capitec

- Fin24

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