Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) and Viability Ratings (VRs) of five South African banks – Absa Bank Limited, FirstRand Bank Limited, Investec Bank Limited, Nedbank Limited and The Standard Bank of South Africa Limited – to ‘BB’ and ‘bb’, respectively. The Outlook on all the IDRs is Negative.
The rating action is driven by the expected negative impact from the coronavirus outbreak on the banks’ operating environment and key financial metrics, notwithstanding uncertainty as to the full economic and financial market implications.
Fitch said they believe the South African operating environment is particularly exposed to the pandemic because of its highly dense and vulnerable communities, and heightened macro-economic risk from falling commodity prices, disruption to tourism, mining activity and manufacturing, as well as pressure on the country’s public finances.
The 21-day ‘lockdown’ that started on March 27 will deliver a further large negative shock to the banks’ operating environment, which was already affected by the country’s very weak economic outlook.
Fitch expects South African banks to face multiple challenges in the near team, including a decline in client activity, lower interest rates, which will put pressure on margins, and rising credit losses. These factors will increase risks to banks’ earnings, asset quality and capitalisation. Debt-relief measures announced by banks will not only affect margins but also mask the extent of asset-quality deterioration.
In a statement, Absa said it remained well capitalised in all of its jurisdictions: “We remain confident that we have significant financial resources to remain resilient through the current crisis.”
Nedbank said the downgrade would have an immaterial impact on the group’s capital position and only a small impact on its cost of funds.