Fitch: Domestic Operating Environment Caps South African Bank Ratings

Tue Aug 26, 2014 7:01am EDT

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(The following statement was released by the rating agency) Link to Fitch Ratings' Report: South African Banks: Peer Review here DUBAI/LONDON, August 26 (Fitch) Fitch Ratings says in a new special report that the operating environment in South Africa acts as a cap to bank ratings. "Absa Bank Limited, FirstRand Bank Limited, Nedbank Limited and The Standard Bank of South Africa and their relevant rated holding companies all have Viability Ratings of 'bbb', which are effectively capped by the operating environment at this rating level," says Redmond Ramsdale, a Director in Fitch's Financial Institutions team. Four major South African banks have Issuer Default Ratings driven by their standalone strength, reflected by their Viability Ratings: FirstRand Bank Limited, Nedbank Limited, The Standard Bank of South Africa Limited and Investec Bank Limited. The Issuer Default Ratings of Barclays Africa Group Limited and Absa Bank Limited are driven by support from their parent Barclays Bank plc (A/Stable). The Negative Outlook on Absa Bank Limited, FirstRand Bank Limited, Nedbank Limited and The Standard Bank of South Africa reflects that of the South African sovereign. The banks' ratings would be downgraded if the sovereign is downgraded. Investec Bank Limited is rated one notch lower at 'bbb-' and would not be downgraded if the sovereign is downgraded by one notch. Fitch believes the propensity to support banks is weakening in South Africa with the impending adoption of resolution legislation. But a moderate likelihood of support for systemically important banks will remain. Its approach to factoring in state support for systemically important banks does not change, despite the resolution of African Bank. The South African major banks reported improved earnings during 2013, mainly due to higher corporate loans and advances, and the banks' African business outside South Africa (excluding Investec). Fitch believes this improvement will, however, be difficult to maintain due to slow GDP growth, a low interest rate environment (although on an upward trend), a fairly saturated lending market and indebted consumers. Near-term improvements in earnings may still be possible from higher margins arising from the trend change in loan book mix, with growth in unsecured personal lending and vehicle financing at the major banks, excluding Investec. In 2013 unsecured lending growth reduced significantly in light of its emerging weak performance. Due to anaemic domestic economic conditions, we consider that longer-term growth prospects are likely to be driven by expansion into the rest of Africa for the big four (excluding Investec). The non-performing loan (NPL) ratios of the South African banks have been improving since 2010 following a turn in the credit cycle. Lower NPLs have been supported by sustained low interest rates. In the medium term, Fitch expects loan impairment charges for the major banks, excluding Investec, to stabilise at 100bp-120bp of loans. The agency expects Investec's impairment charge ratio to remain stable at a lower level, due to its different loan book composition as a specialist bank and asset manager. Fitch considers the major banks' Fitch core capital ratios as appropriate for the operating environment. The report, 'Domestic Operating Environment Caps South African Bank Ratings', is available on www.fitchratings.com or by clicking on the link above. Contact: Redmond Ramsdale Director +971 4 424 1202 Fitch Ratings Limited Al Thuraya Tower 1, Office 1806 Dubai Media City P.O. Box 502030, Dubai Mahin Dissanayake Director +44 20 3530 1618 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available at www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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