Moody’s place South Africa’s Banks, Old Mutual, Eskom on review for downgrade

Johannesburg, South Africa, Capital Markets in Africa — Moody’s Investors Service placed on review for downgrade the Baa2 long-term deposit and senior debt ratings of the five largest South African banks: Standard Bank of South Africa, FirstRand Bank Limited, ABSA Bank Limited, Nedbank Limited, and Invective Bank Ltd. The rating agency has also placed on review for downgrade Standard Bank Group’s Baa3 issuer rating.

It also placed the Baa3 senior debt rating of Old Mutual Wealth Life Assurance Limited and placed the Ba1 senior unsecured and the (P)Ba1 senior unsecured medium-term note ratings of Eskom on review for downgrade.

The rating action was driven by the weakening of the government’s credit profile, as captured by Moody’s review for downgrade of SA’s Baa2 bond and issuer ratings initiated on March 8 2016, the agency said.

The Moody’s estimate of a high-level of government support in the event of financial distress was underpinned by Eskom’s strategic importance to the government’s social and economic policy, as the country’s dominant electricity supplier, the agency said.

Moody’s expectation of government support being provided in the event of need was evidenced by direct financial support in the form of a R350bn guarantee framework agreement, a R60bn shareholder loan that was converted into equity in 2015, and a planned R23bn equity injection, of which R18bn had already been provided, Moody’s said.

Each of the banks has significant sovereign debt securities holdings, linking their creditworthiness to the national government. But they also struggle with the weaker economic climate in general, where consumer affordability pressures and indebtedness, along with increasing interest rates, will strain loan performance.
The top five banks’ overall sovereign exposure, including loans to state-related entities, averages around 144 per cent of their capital bases, according to South African Reserve Bank’s (SARB) regulatory returns as of December 2015, cited by Moody’s.