Fitch cuts SA’s five largest banks deeper into junk status

SA’s five largest banks have been downgraded further into junk status by Fitch Ratings, which expects SA to be particularly affected by the Covid-19 outbreak.

Standard Bank, Absa, Investec, FirstRand and Nedbank have seen seen their ratings lowered to BB by Fitch, which is two rungs below investment grade, and one below SA’s BB+ Fitch rating.

Fitch said late on Tuesday that it expects SA banks to face multiple challenges in the near term, including a decline in client activity and lower interest rates, which will put pressure on margins and lead to rising credit losses.

“We believe the SA 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,” Fitch said.

Moody’s Investors Service has also downgraded the long-term local and foreign currency deposit ratings of SA’s five largest banks to Ba1 from Baa3, with a negative outlook.

SA’s sovereign ratings act as a ceiling and the rating of banks cannot be above that of SA, with Moody’s noting it did not have any “particular governance concern” for the rated banks.

Moody’s, however, expects SA’s economy to contract 2.5% in 2020, which will put pressure on the profitability of banks, and lead to a rise in credit impairments.

“A secondary driver of today’s rating actions is the weakening credit profile of the SA government given banks’ high sovereign exposure, mainly in the form of government debt securities held as part of their prudential liquidity requirements, which links their credit profiles to that of the government,” Moody’s said.

In morning trade on Tuesday, the JSE’s banking index was up 2.29%, with that index faring well despite losses for most other indices. The banking index has fallen 41.19% so far in 2020, compared to a loss of 23% fall in the all share.

gernetzkyk@businesslive.co.za