SA financial institutions face Moody’s downgrade

Several of the country’s financial institutions have been downgraded by ratings agency Moody’s, bringing their credit rating in line with the country’s recently downgraded status. Among the institutions downgraded are 10 regional and local governments, as well as three government related entities. Five banks were also downgraded, with the outlook for all these entities changed to negative.

In April, ratings agency Standard & Poor’s (S&P) also downgraded a number of South African institutions, following its downgrade of the country’s credit rating. At the time, S&P explained that it does not rate financial institutions in South Africa above the foreign currency sovereign ratings, as such it was unavoidable that the institutions rated above the sovereign rating at the time would be downgraded.

Moody’s downgrades the banks

The five banks that have been downgraded by Moody’s are: Standard Bank, Absa, FirstRand, Nedbank and Investec.

“The primary driver for today's rating downgrades is the challenging operating environment in South Africa, characterized by a pronounced economic slowdown, and weakening institutional strength that has led Moody's to lower South Africa's Macro Profile score to 'Moderate-' from 'Moderate'. The lower Macro Profile exerts pressure on the individual factors on banks' scorecards, and implies that the country's banks need stronger loss-absorption and liquidity buffers to withstand the headwinds and in order to remain at the same rating levels,” explained Moody’s in a statement yesterday.

The ratings agency further highlighted that the negative outlook assigned to the banks is primarily linked to the negative outlook of the country’s sovereign rating. “The weakening credit quality of sovereign bonds weighs on the banks' own creditworthiness given their large holdings of government securities,” added Moody’s.

While Moody’s noted that it expects the banks’ financial fundamentals to remain robust, “the weak economic environment increases the downside risks for the banks' asset quality and core capital levels.”

It added: “The relatively weak economic growth points to potentially higher impairments for the banks, especially on the retail front, exerting some pressure on their earnings and testing the resilient performance they have demonstrated in recent years. However, Moody's does not anticipate that the asset quality deterioration will compromise materially banks' recurring earnings, and expects banks will maintain healthy capital levels.”

Government downgrades

“The decision to downgrade by one notch the long term global scale ratings of 10 regional and local governments and three government-related issuers reflects their close operational and financial linkages with the national government, illustrating the centralised nature of the local public sector in South Africa,” explained Moody’s.

The metropolitan cities that have been downgraded are:

• City of Cape Town,
• Ekurhuleni Metropolitan Municipality,
• City of Johannesburg,
• City of Tshwane,
• Mangaung Metropolitan Municipality and
• Nelson Mandela Bay Metropolitan Municipality

Moody’s pointed out that while these cities have reasonably rich economic bases, as well as sound financials and good governance practices, there is an expectation that reduced growth prospects in the medium-term will put pressure on the overall financial performance of these cities.

The local and district municipalities downgraded are Rustenburg, Mbombela, Breede Valley and Amathole District. As with the metropoles above, Moody’s stated that these municipalities are also exposed to the country’s waning economic environment.

“Local municipalities are highly reliant on government transfers for operations and capital investments. Moreover, volatile budget results, resulting from less sophisticated budget planning, are a major factor behind most of the ratings being lower than those of metropolitan cities,” revealed Moody’s.

In addition to these metropoles and municipalities, Moody’s also downgraded the East Rand Water Care Company (ERWAT), South African National Roads Agency (SANRAL) and City Power Johannesburg. The downgrade of ERWAT and City Power reflect the downgrades in their respective municipalities, while SANRAL’s downgrade reflects the country’s weak credit profile.

What affects ratings decisions?

The ratings of the banks and the various government related entities rely heavily on the country’s sovereign rating with regards to any upgrades that may be experienced. However, there are a number of factors which could influence the ratings decisions of these institutions with regards to downgrades, independent of the sovereign rating.

“The banks' ratings could be downgraded if operating conditions worsen more than currently anticipated, leading to significantly higher loan loss provisions that prompt deterioration in the banks' earnings and capital metrics that exceed the rating agency's expectations,” explained Moody’s.

With regards to the regional and local governments and government entities, Moody’s highlighted that a further weakening of the country’s sovereign credit rating could result in further downgrades for these institutions. Furthermore, any difficulties that result in cash-flow issues, as well as consistently high or growing debt levels could also lead to a further downgrade, regardless of what happens with the country’s sovereign credit rating.