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Moody's downgrades five SA banks

Feb 29 2012 15:32 I-Net Bridge

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Johannesburg - Credit rating agency Moody's Investors Service has downgraded by one notch the senior debt and deposit ratings of five South African banks. The banks are Standard Bank Group [JSE:SBK], Absa Bank [JSE:ASA], FirstRand [JSE:FSR], Nedbank [JSE:NED] and Investec [JSE:INL].

The downgrades reflect the impact of the country's increasingly constrained public finances and Moody's view that authorities would face challenging policy choices if multiple institutions were to need its financial support at the same time, Moody's said in a statement on Wednesday.

The downgrades are part of Moody's global assessment of the systemic support levels incorporated in banks' deposit and debt ratings, which addresses the growing difficulties governments face in extending systemic support to their banking systems.

"Today's rating action is not driven by a deterioration in the standalone financial strength or the financial performance of these five institutions and concludes Moody's review for downgrade of these banks, initiated on 10 November 2011," it said.

In addition, Moody's also downgraded by one notch the subordinated debt instruments of these banks, in addition to African Bank's EMTN subordinated debt programme ratings.

These downgrades reflect the removal of systemic support assumptions from the subordinated debt instruments of South African banks, prompted by Moody's expectation that authorities will likely make greater use of their resolution tools to allow burden sharing with subordinated bondholders.

Moody's reassessment of the support environment assumes a reduced capacity of the SA authorities to provide support to financial institutions if needed. This reduced capacity is also signalled by the negative outlook on South Africa's A3 rating, which reflects the potential of increased pressure on the government's finances.

The reassessment is in line with recent global trends, where sovereigns dealing with a systemic banking crisis possess more limited options and face constrains in providing financial support.

The change in systemic support assumptions has resulted in the reduction of systemic support rating uplift to one notch from two notches before, for the five largest South African banks.

Despite the South African government's more constrained financial flexibility to absorb banking-related contingent liabilities under a tail-risk scenario, Moody's believes that systemic support is still warranted in the banks' ratings as the authorities have sufficient powers to intervene, despite some constraints.

"In addition, Moody's does not foresee any meaningful political resistance from either the government or the electorate that would compromise in any significant way Sarb's (the South African Reserve Bank's) willingness and ability to support the banking system.

"Moody's also believes that the five largest South African banks are systemically important institutions for the country's payment system, and that authorities would be willing to support them if required," it said.

Moody's has also removed systemic support from the subordinated debt instruments of South African banks. The rating action was prompted by the rating agency's view that systemic support may not be extended to these instruments in case of financial distress.

Subordinated debt is typically recognised in banks' capital structure as Tier 2 capital, and we expect South African authorities to make greater use of their resolution tools to allow burden sharing with subordinated bondholders.

Subordinated debt is now rated one notch lower than a bank's standalone rating or adjusted standalone rating in the case of Absa Bank that incorporates parental support, while any undated junior subordinated debt is rated two notches below the standalone rating or adjusted standalone rating.

Following the adjustment in Absa Bank's ratings to reflect the lower systemic support, Absa Bank's ratings have been left on review, in line with the review for downgrade of the standalone ratings of its parent, Barclays Bank (which owns 55.5% of Absa Bank), announced on 15 February 2012.02.29

The review indicates that Barclay's A3 standalone credit strength, as reflected by its BFSR of C, could be lowered to either the same level as Absa's Baa1 standalone credit strength, or lower.

Consequently, Moody's will review the parental support incorporated in Absa's ratings, following the conclusion of Barclay's standalone rating review and an assessment of its financial capacity to support its African subsidiary if required.

Moody's notes that Absa's ratings currently benefit from one notch of rating uplift due to parental support from a financially stronger parent bank, which may no longer be the case going forward.

Moody's also acknowledges that Absa, which accounts for approximately 10% of Barclays group's total revenues, will continue to benefit from and leverage the banking and operational expertise available from the parent bank.

Furthermore, Absa remains a self-sufficient and operationally independent entity without any funding dependence from Barclays.

Any indication of a weakening of the South African authorities' willingness to support any of the above-mentioned banks or any significant deterioration in their capacity to extend financial support, could negatively affect the banks' deposit and debt ratings.

Moody's believes there is little likelihood of any upward rating momentum driven by increased systemic support for the banks covered by today's announcement, or from a strengthening of their standalone credit assessments in the currently challenging economic environment.

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