Fitch Ratings agency thinks it would be better to lend to five of the country’s largest banks than the government itself.
This emerged following a surprise move on Tuesday when the ratings agency that assesses the creditworthiness of institutions around the world upgraded the national long-term ratings of the country’s five largest banks by assets to “AA+ (zaf)” from “AA (zaf)".
“The upgrades reflect Fitch's view that the SA banks' creditworthiness has improved relative to the best credits in the country, including the sovereign and government-related entities,” Fitch said.
National-scale ratings rank the issuers in an individual market and are designed to help local investors differentiate risk.
In this case, Fitch is indicating that it views the five banks as the strongest of its peers in the local market, and even safer from a creditworthiness perspective than the government.
The banks comprise the traditional “big four” — Absa, FirstRand, Nedbank and Standard Bank — and Investec.
Fitch also upgraded the national long-term ratings of four of the bank’s holding companies — the listed entities that own stakes in nonbank businesses such as insurance and asset management. This applied to Absa, Investec, Nedbank and Standard Bank.
In November, Fitch downgraded the SA government’s long-term issuer default rating to “BB-” from “BB” — three notches below junk. Long-term issuer default ratings are the main yardstick for measuring the credit strength of an issuer.
As a consequence, it also downgraded the long-term issuer default ratings of the five banks to “BB-” on account of the fact that banks cannot be rated higher than the sovereign, which may be called on to support them during a crisis.
This comes as banks wade through what is considered as the worst crisis in at least fifty years. In the most recent set of results, banks saw their profitability fall sharply as a result of increasing provisions for bad-debt write-offs.
The “big four” all suspended dividends in line with guidance from the Reserve Bank to strengthen balance sheets as they work off bad debts following stringent lockdown requirements that have left as many as 1.6-million South Africans without jobs.
Fitch noted the banks have capital buffers in excess of regulatory requirements “and we expect them to remain broadly stable despite current pressures on asset quality and earnings”.
Limited reliance on external funding sources as a result of large customer-deposit funding bases was also cited as a key strength during the current turmoil.
“Fitch believes the banks have significant headroom to withstand current pressures on the operating environment,” the agency concluded.
The ratings agency’s outlook is stable. The banks could get upgraded again if they perform “satisfactorily” while others experience increased stress. Conversely, they may be downgraded if there are “material deteriorations in asset quality, profitability and capital”.
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