In a recent assessment, Moody’s Ratings upgraded the deposit ratings of seven major South African banks, demonstrating their resilience in capital, funding, and profitability. The banks under review—Standard Bank, Absa, FirstRand, Nedbank, Investec, African Bank, and Bidvest—received a notable two-notch increase in their long-term deposit ratings. Additionally, the senior unsecured program ratings of the four largest banks experienced a one-notch upgrade.
This positive shift follows Moody’s application of the Advanced Loss Given Failure (LGF) analysis, which gauges the potential impact of a bank’s failure on various debt classes and deposits. Despite challenges and some asset quality pressures, the banks maintain a stable outlook, reflecting Moody’s belief that their existing liability structures will remain relatively unchanged in the next 12 to 18 months.
The seven banks individually assessed by Moody’s are as follows:
Absa Bank:
While boasting a stable deposit base, moderate profitability, and adequate capitalisation, Absa faces challenges in a demanding operating environment marked by high interest rates, ongoing power shortages, and infrastructure constraints. The bank’s reliance on institutional depositors and exposure to government bonds further influences its credit profile.
African Bank:
African Bank’s rating reflects commendable capital buffers and an improved funding and liquidity profile as it diversifies its deposit and funding base. Operating in a consumer-challenging environment with high interest rates impacting disposable income, the bank aims for a gradual recovery through tightened credit criteria and revenue base expansion.
Bidvest Bank:
Bidvest Bank’s rating considers strong capitalization and high liquidity, coupled with niche franchises in foreign exchange and vehicle leasing. However, the bank contends with relatively weak asset quality marked by high problem loans resulting from significant credit concentrations.
FirstRand:
FirstRand exhibits strong profitability, outpacing local peers, supported by a multi-branded business portfolio and a robust transactional franchise. Despite these strengths, its exposure to sovereign debt securities and institutional funding, coupled with risks related to inflation and interest rates, pose challenges to asset quality.
Investec Bank:
Investec’s focus on high-net-worth individuals results in sound asset quality metrics and ample liquidity buffers. However, operating in challenging conditions in South Africa, the bank’s credit profile is influenced by confidence-sensitive wholesale deposits and a substantial exposure to government bonds.
Standard Bank:
With robust risk management, solid capitalization, high liquidity, and sound profitability, Standard Bank stands as the country’s largest bank with a strong domestic franchise. However, its significant exposure to sovereign debt securities and confidence-sensitive institutional deposits exposes it to risks, particularly concerning asset quality amidst elevated inflation and higher interest rates.
Nedbank:
Possessing a solid local franchise, Nedbank invests in digitisation to enhance product optimization and client service. While maintaining sound liquidity buffers and adequate capitalization, the bank contends with a challenging operating environment that affects the country’s economic growth. Its reliance on wholesale deposit funding and exposure to government bonds ties its credit profile to that of the government.
Moody’s cited factors such as standalone creditworthiness and the deployment of instruments to absorb losses as potential triggers for ratings upgrades. Conversely, a credit rating downgrade could occur if the South African government’s credit profile leads to an overall sovereign downgrade, impacting the baseline credit assessments of the banks.
The South African banking sector’s upward trajectory, as acknowledged by Moody’s, underlines the resilience and adaptability of these financial institutions amidst dynamic economic conditions.
