UPDATE 1-Moody's downgrades South Africa's four biggest banks

Tue Aug 19, 2014 1:09pm EDT

Related Topics

* Long term local-currency deposit down to Baa1 from A3

* Long term national scale deposit cut to Aa3.za from Aa2.za

* Central banks says sector remains health and robust (Adds SARB comment)

By Helen Nyambura and Xola Potelwa

JOHANNESBURG, Aug 19 (Reuters) - Ratings agency Moody's downgraded South Africa's four biggest banks on Tuesday and put them on review for further cuts, saying there was a lower likelihood of support from the central bank to protect creditors after African Bank's debt crisis.

Moody's cut by a notch the long term local currency deposit ratings for Standard Bank of South Africa, FirstRand , Nedbank and Absa Bank, the local operation for Barclays Group Africa.

The South African Reserve Bank (SARB) said it did not agree with the reasons given for Moody's downgrade.

The ratings agency said it was adjusting its view following the $1.6 billion bailout of African Bank by the SARB.

Moody's said while SARB's actions mitigated the risk of contagion across the banking sector, the regulator had indicated by its actions it was willing to impose losses on creditors.

"The one notch downgrade ... reflects Moody's view of the lower likelihood of systemic support from South African authorities to fully protect creditors in the event of need," the ratings agency said in a statement.

The ratings change comes days after a downgrade of smaller lender Capitec, which had been prompted by the bailout for unsecured lender African Bank.

"The South African banking sector remains healthy and robust," the central bank said in a statement.

Impaired advances were only 3.57 percent of total loans in the industry while banks' capital adequacy was 14.87 percent, it said.

SARB also disputed the downgrade of Capitec at the time because the lender had a different model to African Bank.

The news was released after the stock market close.

OVERREACTION?

Some analysts believe the latest wave of downgrades may be an overreaction.

"One bank with a highly flawed business model went into curatorship, and now we see a possible overreaction, with a downgrade to every other major bank in South Africa," said Razia Khan, Head of Africa Research at Standard Chartered.

"The South African banking system remains (on the whole) one of the best-regulated globally," Khan added.

Moody's also downgraded long-term national scale deposit ratings for the lenders and placed foreign-currency ratings for the four and smaller lender Investec on review.

"The review for downgrade reflects the rating agency's concerns regarding weaker economic growth, particularly in the context of consumer affordability pressures and still high consumer indebtedness that are likely to lead to higher credit costs for the banks," Moody's said.

African Bank has suffered under the failure of many of its core market of low-income borrowers - hit by unemployment, slow economic growth and stubbornly high inflation - to repay loans.

Economists said problems with unsecured lending - high-interest loans not backed by collateral which totalled 12 percent of South African banks' credit exposure at the end of January - highlight deeper economic issues.

South African household debt averages around 75 percent of disposable income, meaning servicing debt is a huge burden for low-income households, where food costs alone account for one-third of expenditure. (Editing by David Evans)

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