Fitch continues to refrain from rating SA banks

The Prudential Authority (PA) has started reassessing eligible external credit assessment institutions (ECAIs) to determine whether they continue to meet the criteria specified in the regulations, with ratings agency Fitch still derecognised after opting out nearly a decade ago.

The PA said it had informed banks of its decision to derecognise Fitch Ratings as an eligible ECAI, with the only recognised agencies  being GCR Ratings, Moody’s Investors Service and Standard & Poor’s Ratings Services. 

“Section 85A of the Banks Act compels banks to only use the ratings of eligible ECAIs which are approved by the PA to act as eligible institutions. It is the PA’s responsibility to determine on an ongoing basis whether an ECAI meets the eligibility criteria,” the regulator said.

“The PA has initiated the process of reassessing current eligible ECAIs ... to determine whether they continue to meet the criteria specified in regulation 51 of the regulations.”

Fitch in 2015 withdrew the credit ratings agency registration of its SA subsidiary, Fitch Southern Africa.

The ratings agency seems not to have plans to reinstate its recognition by the banking regulators in SA, referring Business Day to its 2015 statement in which it said its decision was to “maintain an optimal level of analytical resources in each geographic location in which it operates”.

Zaronia rate

The SA banking sector will soon transition from Johannesburg interbank average rate (Jibar), which is widely used as a reference rate that underpins many financial contracts and valuations, to the SA rand overnight index average (Zaronia) rate.

The Zaronia rate reflects the interest rate at which rand-denominated overnight wholesale funds are obtained by commercial banks. It is based on actual transactions and calculated as a trimmed, volume-weighted mean of interest rates paid on eligible unsecured overnight deposits.

The PA said the transition was important for SA’s financial markets.

“The Jibar is being replaced by the Zaronia rate. The transition ... is crucial for SA’s financial markets, with over R46-trillion in various financial instruments. Zaronia is expected to improve market representation and provide a more accurate reflection of market conditions based on actual transactions.”

The regulator said banks that used the internal ratings-based (IRB) approach to capital requirements for credit risk have started reporting on the new data and assessment templates from the 2023 reporting period, with an initial focus on the corporate and SME portfolios.

Compliance

“These templates are intended to assess banks’ compliance with the IRB minimum requirements, specifically on areas such as the use of data to develop IRB credit risk models, the effectiveness of internal governance processes, the role of internal audit functions, and the oversight responsibilities of boards,” the PA said.

“Overall, the information submitted for the 2023 reporting period showed that banks are compliant with the minimum requirements, though there were a few areas of concern. Data quality is still a challenge for some portfolios, for which banks largely have plans in place to remediate the gaps.”

The PA said operational risk was a key concern. “The PA saw a noticeable increase in internal and external fraudulent activities in 2023, as criminal syndicates have become more sophisticated. There has also been growing emphasis on improving the tools to measure and manage operational risks,” the watchdog said.

Khumalok@businesslive.co.za