Banks downgraded but not to worry
Katharine Child | 2017-04-06 11:33:38.0
Standard & Poor’s downgraded its ratings for seven local banks to junk status following its decision to rate the country’s foreign debt as junk status.
Image by: Brendan McDermid/Reuters
Standard & Poor’s yesterday downgraded its ratings for seven local banks to junk status following its decision to rate the country’s foreign debt as junk status.
The rating agency outlook measurement on the banks is negative‚ suggesting further downgrades.
S&P said the bank downgrade was because “we do not rate financial institutions in South Africa above the foreign currency sovereign ratings‚ due to the direct and indirect impact that sovereign distress would have on banks’ operations”.
“It is inevitable after a country’s downgrade that few days later banks get downgraded. You can’t have an institution that has a higher rating than government because government is more stable and likely to pay back its debt‚” said Adrian Cloete‚ analyst and portfolio manager at PSG.
He said the downgrade was unlikely to affect banking operations and that South Africa banks remain profitable and stable.
A rating is a measure of how likely a country or company is to pay back debt. But Cloete said banks did not borrow money on capital markets. The money the banks need to expand is earned from shareholders who buy shares‚ he explained.
Therefore‚ a rating is much more important to a government‚ like that of South Africa‚ whose debt is 50% of its gross domestic product (GDP) and which regularly borrows money to pay its bills.
The banks affected are Investec‚ Nedbank‚ Barclays Africa (Absa)‚ the local division of BNP Paribas‚ and FirstRand‚ which owns Rand Merchant Bank and First National Bank.
S&P said the reason for lowering the banks credit rating was the country’s instability‚ rather than the banks‚ internal operations. It emphasised that the banks will still be profitable and had very low amounts of bad debt from embattled customers who don’t repay loans.
“The lowering of the ratings on South Africa reflects our view that political and institutional stability in the country has weakened.”
But S&P emphasised the banks were still doing fine. “However‚ amid slow economic growth and political turbulence‚ South African banks have been performing resiliently. The sector’s average return on assets improved to 1.3% in 2016 from 1.1% the previous year.”