SA’s five largest banks suffered more cuts to their credit ratings on Wednesday as Moody’s Investors Service downgraded them to junk for the first time while Fitch cut them further into non-investment grade.

The country’s five largest bank by assets — Absa, FirstRand, Nedbank and Standard Bank, as well as Investec — saw their local and foreign currency deposit ratings lowered to junk by Moody’s. 

“The primary driver for today’s rating actions is the increasingly difficult operating environment for banks in SA,” Moody’s said. The ratings moved from Baa3 to Ba1, representing a move into junk. 

Moody’s also lowered the long-term issuer ratings of Absa and Standard Bank Group, the holding companies of the two banks. 

The move was not entirely unexpected following the rating agency’s decision to downgrade SA’s last remaining investment rating on Friday.

This, it said, was due to the continuing deterioration in the country’s fiscal strength and structurally weak growth, which the agency does not expect will be addressed by the government adequately based on current policies.

The weak economy will lead to “a deterioration of the banking system’s problem loan ratio over the next 12-18 months”, further eroding borrowers’ cash flows and making it more difficult for them to meet their loan obligations, Moody’s said.

Fitch said late on Tuesday that it expects South African 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 macroeconomic risk from falling commodity prices, disruption to tourism, mining activity and manufacturing, as well as pressure on the country’s public finances,” Fitch said.

Absa, which had its group holding company downgraded too, said it has been pre-emptively building substantial buffers to withstand the stress of a downgrade by Moody’s of SA’s credit rating. This has left it with R38bn in excess capital.

“Absa’s liquidity position remains strong, with sources of liquidity of R233bn, including a significant surplus in foreign currency,” it stated in response to the decision.

Standard Bank says the next few months will be challenging for everyone.

“We need to flatten the curve of the coronavirus pandemic so that we can return to work to repair and then grow our economy. The nation should continue to focus on putting a stop to the spread of Covid-19. We should also ready ourselves for the post-Covid-19 recovery and reconstruction, which must necessarily entail an acceleration of structural reforms on a broad scale,” said Standard Bank SA CEO Lungisa Fuzile.