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Zuma curse stalks SA banks as bond sales set to stall

Apr 13 2017 14:53
Renee Bonorchis, Bloomberg News

Johannesburg - Just as things were starting to look up for South African banks with economic growth and lending poised to rebound, President Jacob Zuma struck.

The fallout from a midnight cabinet purge by Zuma on March 31 threatens to stall debt sales by financial services companies, which had risen to a record on a quarterly basis in the first three months of the year, according to data compiled by Bloomberg.

“In this time of uncertainty, growth is going to be constrained and bank issuance will probably be lower than in previous years,” said Rashaad Tayob, who oversees about R13.5bn as a portfolio manager at Abax Investments in Cape Town. “If they don’t see credit growth then they won’t need to raise funding.”

READ: Deep discount lures buyers to SA banks despite junk

Zuma shocked investors by firing finance minister Pravin Gordhan as part of 19 other changes to his administration. The rand plummeted and bond yields soared after the move, while bank stocks were hit particularly hard.

Other companies are also feeling the pinch, with at least three auctions being canceled after Fitch Ratings cut South Africa’s local and international ratings to below investment grade on April 7, only days after S&P Global Ratings reduced the country’s global ratings to junk.

READ: S&P downgrades SA banks to junk status

Issuance by banks, insurers and real estate investment trusts rose to R27.2bn in the first three months of this year, accounting for almost 70% of debt sales, according to data compiled by Bloomberg.

Bond sales by financial services companies had dropped to a three-year low in 2016 after Zuma’s decision in December 2015 to replace Nhlanhla Nene as finance minister with a little-known lawmaker, before backtracking and appointing Gordhan, who had served in the post before.

Credit demand

South Africa’s largest banks were expected to accelerate lending in 2017 with economic growth seen improving after an expansion of 0.3% in 2016, the slowest pace since the 2009 recession, Ernst & Young said on March 7.

An improvement in non-performing loans was also seen as boosting the granting of credit, it said. That may no longer be the case as rand weakness typically spurs inflation, which curbs spending and the fees banks make off transactions, while making loans harder to repay.

The cost of issuance “has already increased”,  Sam Moss, a spokesperson for Johannesburg-based FirstRand [JSE:FSR], said by email on April 11. Any future sales will have to be determined by demand for credit, she said. FirstRand had started increasing debt issuance just two months ago to meet rising investor demand and benefit from declining borrowing rates.

‘Not conducive’

“Ratings downgrades are not conducive to economic growth and job creation and as such, we will maintain our cautious approach to credit,” said Andre du Plessis, chief financial officer of Capitec Bank [JSE:CPI], the country’s biggest provider of unsecured credit.

The lender, based in Stellenbosch, near Cape Town, is reducing the volume of its wholesale debt raised in the bond market, thanks in part to the downgrades, but also because its fixed-term retail deposit base has grown, he said.

Yields on benchmark government bonds due December 2026 have jumped 46 basis points since Gordhan was recalled from an investor road show by Zuma on March 27. The rand has weakened 7.6% against the dollar, the biggest decline among 31 major and emerging-market currencies tracked by Bloomberg.

That deterioration has spurred Barloworld [JSE:BAW], which distributes equipment for Caterpillar, MTN [JSE:MTN], and the South African National Roads Agency (Sanral) to pull out of bond auctions, according to FirstRand’s Ashburton Investments and Abax Investments.

‘Considering implications’

Still, the bond market is not the only source of funding for the country’s lenders, which include Barclays Africa [JSE:BGA] and Investec [JSE:INL]. About 7% of Nedbank's [JSE:NED] total funding base is raised in debt markets and Investec’s loan-to-deposit ratio was 76% at the end of February.

Standard Bank [JSE:SBK], which issued the most debt in the first quarter with eight sales totaling R6.1bn, declined to comment.

“Given the downgrades, and potential for further adverse ratings actions, we are actively considering the implications of these actions on all aspects of our business and strategy,” said Michael Davis, executive head for balance sheet management at Johannesburg-based Nedbank.

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