15/3/2018/Fitch Ratings

Fitch Ratings has published a peer review of the five main South African banks, which together supplied 94% of domestic credit at end-June 2017.

As part of its peer rating review in December 2017, Fitch had affirmed the Long-Term Issuer Default Ratings (IDRs) at ‘BB+’ for Absa Bank Limited, Barclays Africa Group Limited (BAGL), FirstRand Bank Limited (FRB), Investec Bank Limited (IBL), Investec Limited (INL), Nedbank Group Limited (NBG), Nedbank Limited (NBL), The Standard Bank of South Africa Limited (SBSA) and Standard Bank Group Limited (SBG). Fitch does not rate the holding company of FRB, FirstRand Limited. The Outlooks on all Long-Term IDRs are Stable, in line with the sovereign rating, which is also ‘BB+’.

Each of the entities’ ratings are capped by the sovereign credit profile, given considerable exposure to sovereign credit risk through investments in sovereign debt and exposure to various state-owned enterprises (SOEs). This has had a knock-on effect through a muted domestic operating environment, characterised by low GDP growth and political instability, which is helping to slow earnings growth.

The ratings also consider well-developed financial markets and regulation, which we believe is in line with many developed markets. Other positive aspects of the ratings include capable management and sound risk management and governance. The ratings are also supported by a favourable banking system structure, in which the five banks dominate the domestic market. This has created solid franchises through high barriers to entry, which have underpinned good and stable performance metrics over a sustained period.

Asset quality has remained sound despite the weak macroeconomic backdrop. Formation of new non-performing loans is low and impairment charges erode only a modest proportion of earnings. The South African economy is diverse and concentrations (by sector or single obligor) are not a concern unlike many other emerging markets.

In Fitch’s view, all banks are adequately capitalised. Capital ratios are comfortably above phased-in Basel III requirements. Internal capital generation is the primary contributor to capital accumulation, while muted loan growth has also supported capital ratios. Although capital ratios are lower than in many emerging markets, they are in our view commensurate with risks given low concentrations and sound risk management. Access to capital is good, particularly by emerging market standards, with a sophisticated and relatively deep domestic capital market.

Banks are mostly deposit funded but suffer from a limited amount of available retail deposits as many savers use intermediary money managers. This makes deposits more sensitive in a crisis scenario. Banks are gradually growing more traditional deposits. Liquidity is also being accumulated gradually and banks already meet phased-in Basel III requirements. However, liquidity is sensitive to sentiment of a large foreign investor presence in the domestic capital market, although direct reliance on foreign-currency and non-resident depositors is limited.