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Johannesburg - Moody's surprise downgrade of the country's four biggest banks sent shares in the lenders lower on Wednesday and piled further pressure on the economy, analysts said.
The South African Reserve Bank (Sarb) criticised the one-notch cut for the local currency deposit ratings for Standard Bank, FirstRand, Nedbank and Absa Bank.
Economists also questioned the downgrade to Baa1 - Moody's eighth highest investment rating - saying it did not take into account the banks' balance sheets.
Moody's decision, announced on Tuesday, followed the collapse of a much smaller lender, African Bank Investment Limited, which needed a roughly R17bn bailout from Sarb.
The ratings firm said Sarb had limited the risk of contagion but showed it was willing to impose losses on creditors.
South Africa's banking index was down 1.8% by 14:20 GMT, with Barclays Africa Group off 2.4%, Standard Bank off 2.2%, and FirstRand and Nedbank both off 1.5%.
"The biggest four financial institutions in South Africa represent an entirely different business model to (African Bank)," said Razia Khan, head of Africa research at Standard Chartered.
Cut in sovereign rating?
Analysts said the downgrade was expected to rein in lending and could even lead to a cut in the sovereign rating as the economy suffers from the fallout.
In June, Standard & Poor's cut South Africa's credit rating while Fitch affirmed the rating, but put the country on its negative watch.
Consumers are struggling with rising interest rates, high inflation, rising debts and job insecurity at a time when one in four people are without work.
Retail sales contracted month-on-month in June, growth in households' disposable income has slowed and banks have pulled back from extending credit, instilling tighter lending criteria partly to stave off bad loans.
"Weak economic growth appears to have been a substantial driver of Moody’s ratings action. There is concern about consumer affordability pressures and high consumer debt levels," said Khan.
Stringent regulations
The Sarb has repeatedly cut its economic growth forecast, which now stands at 1.7% for this year, as a series of strikes, including a five-month long work stoppage in the platinum sector, hurt growth.
With second quarter GDP data due next week, economists are mixed about the ability of the economy to avoid a recession, after the economy contracted in the first quarter.
But economists said South Africa's banks face stringent regulations, which had helped most of them weather the global financial crisis better than lenders in more developed markets.
South African banks have a capital adequacy of 14.87% and impaired advances constitute 3.57% of gross loans, according to the central bank.
Moody's caught off guard?
Patrice Rassou, Cape Town-based head of equities at Sanlam Investment Management, said Moody's was caught off guard by the problems at African Bank, which was crushed by bad loans as its core market of low-income borrowers failed to repay debts.
"Now they are trying to remedy that by painting everyone with the same brush. The key issue is why didn't they see the problems before hand."
The Sarb said it disagreed with Moody's reasoning, arguing that the country's banking sector remained "healthy and robust" despite the problems at African Bank.
Although South Africa's big four banks had participated in the unbridled unsecured lending that characterised much of 2010-2012, these loans accounted for just over a tenth of overall credit exposure, analysts said.
The downgrades might now impinge on the lenders' ability to raise offshore money, some analysts said.
"On a comparative basis, South African banks will find their ability to compete for business in Africa curtailed since the cost of funding, particularly non-rand funding, will increase," said Elena Ilkova, a credit analyst at Rand Merchant Bank.
