South African Banks Cut Deeper Into Junk by Fitch on Virus

JOHANNESBURG (Capital Markets in Africa) — The credit ratings of South Africa’s five largest banks were downgraded deeper into junk by Fitch Ratings, which cited a deteriorating operating environment following the outbreak of the novel coronavirus.

The ratings were reduced by one notch to BB, two steps below investment grade and one notch lower than that of South Africa, Fitch said in a statement late Tuesday. Moody’s Investors Service also lowered its assessment on the lenders one notch to bring it into line with the sovereign, which was downgraded last week.

“The South African operating environment is particularly exposed to the pandemic because of its highly dense and vulnerable communities,” Fitch said. The lenders face multiple challenges including “a decline in client activity, lower interest rates, which will put pressure on margins, and rising credit losses.”

Absa Group Ltd. had anticipated the risk of a sovereign-ratings downgrade and built up “substantial buffers to withstand significant stress scenarios,” the Johannesburg-based company said in an email. “We remain confident that we have significant financial resources to remain resilient through the current crisis.”

The other banks affected by the Fitch downgrade include Standard Bank Group Ltd., Nedbank Group Ltd., Investec Ltd., and the local unit of FirstRand Ltd. The rating cut comes with South Africa already trapped in a recession and the government’s finances stretched following years of mismanagement and corruption.

“This is a bit of a surprise — purely because we have become used to the ratings only moving up and down along with the sovereign rating,” said Jan Meintjes, a portfolio manager at Denker Capital in Cape Town. While the short-term outlook for the banks is very uncertain, “they are well-run institutions with high levels of capital. They will survive this storm and will continue to make decent returns on capital in the medium term.”

The five-member FTSE/JSE Africa Banks Index fell 3.2% as of 9:07 a.m. in Johannesburg, extending losses this year to 44%. Investec dropped less than 1%. South Africa’s benchmark equity gauge declined 2% with more than five shares down for everyone that was up.

Source: Bloomberg Business News