Moody’s “cautious and watchful” on SA banks

International ratings agency warns that SA banks face major downside risks.

International ratings agency Moody’s said at a credit risk conference on Thursday that its outlook for South African banks is “cautious, watchful and tilting to negative”.

Moody’s Cyprus general manager Mardig Haladjian said that, while the ratings agency has not yet downgraded local banks, banking conditions have turned negative and the agency is watching SA banks closely. The gloom comes from both local and global troubles, as economies slow, interest rates and inflation rise and consumers are pinched.

Global gloom

The global banking and financial services sector has sustained two significant shocks in the last year or so. The first was the collapse of the US subprime mortgage market. Globally, subprime losses are expected to cost financial institutions $1trn. So far, global banks have written down around $500bn of that, causing net losses throughout the sector.

The crisis made lenders more risk averse; they are demanding higher returns on assets perceived as risky. This has lead to a drop in the availability of liquidity, particularly in emerging markets, which are seen as more speculative.

South African banks escaped the subprime crisis relatively unscathed (other than some limited write-downs at Investec); their only complaint is that it is more difficult to attract funding in these tight markets.

The second financial sector shock, major shifts in the global economy, has had a more direct impact on local banks. The shifts are closely linked to the first shock – the drying up of liquidity has affected businesses’ investment plans and thus hampered global economic growth – but they are also the result of other factors.

One important one is the commodities bull market, and the associated increase in inflation. Oil prices have risen dramatically in the last year, rising from around $60 a barrel in June last year to over $130 a barrel now. These rising prices are associated with both supply and demand issues, as well as the influence of speculators (see Black gold, white hot prices). Simultaneously, other commodities like platinum, coal, iron ore and gold have risen sharply.

Hand-in-hand with the rise in hard commodities has been a rise in soft commodities like wheat, rice, maize, and sugar. Demand for food has exploded with the rise of China and India, and at the same time, climate change, unseasonal rainfall patterns and poor harvests have put the brakes on food supply, sending prices through the roof. These increases have sparked food riots around the world and Haladjian cautions that Africa is vulnerable to hunger and food-related political unrest.

Domestic doldrums

Against this inflationary global backdrop, South Africa faces its own challenges. High levels of unemployment and the unreliable electricity supply are two of the factors dampening the operating environment and worrying Moody’s analysts. Even more worrying is the effect of inflation (and the associated interest rate increases) on households.

Households in South Africa can be divided into two categories according to whom they borrow from. Higher income households tend to borrow from the big four banks, taking out home, car and personal loans and using credit cards. Lower income households tend to borrow from micro-lenders, and to use retail credit.

These households are affected differently by interest rate hikes and inflation. Bank borrowers have higher incomes, so a smaller proportion of their budgets go towards food and fuel (see table one). This proportion will increase, but will remain modest. However, these customers are exposed to rises in interest rates, so their debt service obligations will rise, squeezing discretionary income.

The low income household, by contrast, spends a much higher proportion of its budget on food and fuel, and thus inflation seriously affects it. However, thanks to the National Credit Act and a reliance on micro-lenders, such consumers are not exposed to interest rate fluctuations.

Table one







Hypothetical income

Hypothetical amount to food and fuel


Hypothetical amount to debt service


High income before inflation and interest rate rises

R 10,000.00

R 2,000.00


R 1,000.00


High income after inflation and interest rate rises

R 10,000.00

R 3,000.00


R 2,000.00


Low income before inflation and interest rate rises

R 3,000.00

R 1,500.00


R 500.00


Low income after inflation and interest rate rises

R 3,000.00

R 2,000.00


R 500.00


Haladjian explained that these pressures on households, which are already becoming apparent, will eventually feed through to the real economy in various ways. Sales will slow for businesses, and banks will reflect less new business, pushing down earnings and valuations. Moody’s expects loan quality at South African banks to deteriorate as households become unable to pay their debt service costs.

On the corporate side, Haladjian admitted that South African corporates are stable for now. However, he argued that as household spending on non-food, fuel and debt costs drops, businesses will experience profitability pressure which could lead to defaults, especially among smaller businesses.

This is already happening – non-performing loan charges on both the retail and, to a lesser degree, corporate loan front have increased greatly at most retail banks – and will only get worse. Moody’s further expects that banks will write less new business, which will automatically make their bad debt ratios worse, affecting their outlooks.

Nevertheless, Moody’s is holding its ratings stable for now, but the storm clouds are certainly gathering, and Moody’s weathermen are anxiously watching the barometer.

Rankings for SA banks




Financial strength


Standard Bank

C+ Stable



C Stable



C Stable


FirstRand Bank

C Positive


Investec Bank

C Stable





Industrial Development Corporation


A2 Positive

Development Bank of Southern Africa


A2 Positive




Imperial Bank

African Bank

Infrastructure Finance Corporation

Mercantile Bank

Capitec Bank

Grindrod Bank

Real People Investment Holdings

See for an explanation of the ranking system



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Comments on this article are closed.

Current account gap at 26-year high

Deficit swells to 9% of GDP.

moodys get a life and your facts the correct rating for south africa at the moment is ccc- or better still on watch

Cash flows are out the window and this is what I have

moody does not have the guts to downgrade any facet of that bankrupt coutry the united states of america

Which country would you invest in? And in what would one invest?

Quote: “One important one is the commodities bull market, and the associated increase in inflation. Oil prices have risen dramatically in the last year, rising from around $60 a barrel in June last year to over $130 a barrel now. These rising prices are associated with both supply and demand issues, as well as the influence of speculators (see Black gold, white hot prices). Simultaneously, other commodities like platinum, coal, iron ore and gold have risen sharply.”

The commodities bullmarket is DRIVEN by inflation. It doesn’t cause inflation. Inflation is the expansion in the money supply and credit. Just look at the Euro/Dollar graph and you’ll see the correlation with commodities. Commodities are priced in dollars (the reserve currency). It’s lost nearly 100% against the Euro in the last 8 years. Now convert the commodity prices into Rands (which is also dropping like a stone BECAUSE OF MONETARY INFLATION !!!) and the effect is amplified.

Rising prices is not the product increasing in value, it is the purchasing power of your money dropping because it is being diluted. Imagine a glass half full (or fricken empty) of orange juice and you fill it up with water. Increasing the money supply has the same effect. Just look at Zimbabwe. Inflation everywhere is the same thing!

SA banks are looking ripe for a takeover. Mboweni has indicated that the for sale signs are down, but with the current account deficit at 9%, the country could use a capital inflow injection and he may just change his tune to protect the rand. The SA banks are in for a rocky year to two, but they cheap nevertheless, and with the worst of the subprime behind the globals, they may be on the hunt for a bargain and a foothold into a grosslly underpenetrated continent.

I somehow seriously doubt that the worst of “subprime” is behind us. Me thinks we are in the eye of the storm…the calm before the storm.

To the colonel, the globals, i.e US and European financials, are in no position to hunt. They are busy selling off assets and raising capital just for self-preservation. The Asians and the Arabs on the other hand, now you’re talking. On something else, I’m in a dilemma. Being black, I qualify for the Sasol Inzalo scheme, yet I have a nagging feeling that my money will be better invested in the banks than in the Sasol scheme. What do the rest of the community think?

Don’t see too many of the Big 4 directors buying shares even at current ‘incredible value’ – bottom not evident yet, and the climb out will be a long haul.

sell your property

pay off your debt

dump your mistresses

No property debt, only incoming moolah

No debt

No Mistresses

The share prices of the big 4 banks are now lower than 3 years ago. Is the market anticipating a major recession/depression in South Africa?

Nope, ‘fraid not! Like all fanatical people, you’re overdoing things.

Are you seriously suggesting that the crude price hasn’t increased inflation? If so, there are 1000 economists who don’t agree! Secondly, the dollar hasn’t lost nearly 100 pc v the Euro?? You can’t use such an expression, its rubbish! Literally, it would mean there would be many, many dollars equal to one Euro, because the dollar would be close to zero! (100pc loss). Clearly this hasn’t happened! You could say the euro has doubled v the dollar, that would make sense, except that it hasn’t! The euro, a new currency, took time to find its level.

More importantly, rising prices CAN occur for reasons other than de facto currency devaluation! For example, crude has doubled in price since June 2007. But the dollar, whatever its problems, has NOT HALVED in value in that time? DEMAND increase raises prices, thats elementary economics! There has been great demand for crude because some countries are experiencing booms (India, China) and they are cushioning their people against price rises by SUBSIDIZING fuel! Thereby increasing demand even more! There’s also a lot of speculator activity.

Currency devaluation IS a bad thing (usually) but economics is much more complex than that! There are many variables involved, certainly not just one.

One of the reasons I read the comments is that I enjoy some humour during a hectic day behind the screens. And one of my favourites is RUS – he is always good for a laugh. BTW, RUS, pls pop in and see me in NY when you come to the States and see what the place is really like.

Find the root (cause) and strike it. Rising prices in general indicate monetary inflation. Rising prices in a stable monetary environment will indicate shortages. i.e. demand exceeding supply. Are you one of those 1000 economist who can’t justify your degree…eish..sorry..I meant “can’t agree”?

I wonder where all the liquidity appeared from that is sloshing around the globe which bid up financial asset prices….and now commodities.

And yes, I’m well aware that there is a mountain of variables out there than what one has to think about. My comments don’t usually reflect my thoughts on them. I just share my deductions. Nobody ever agrees with me, and of course I couldn’t give a damn. Yet the chickens I’ve mentioned long ago in previous comments have come home to roost. I never ever heard or saw market commenators mentioning the same.

Maybe it’s because I just have a matric 😀

When it comes to all the B*U*L*L*S*******and lies. That’s why I do my own research and manage

Is it possible that the global demand for oil increased so much that it will cause the “vraag na olie” to double in 12 months…?

I don’t buy it! Just like the excuse our local elec supplier used in the beginning to say why everything is packing up and loadshedding is the answer.

In 1996 oil was $20barrel till (fluctuating to) $39 in 2003. 2003 $39 – $69 late 2007. In 2007 started at $45 and increased to $139 last week. I don’t think everyone all over the world all of a sudden got a car in the last year or so, did they?

I don’t buy the demand card! Whatever it is… it WAS a clever idea? OIL will drop as soon as this scelleton jumps out ….

The crux is from 1996 $20 / b – (early) 2007 $45 / b is a increase of $25 in TEN YEARS. from 2007 to nou increase $90…

Hey Moody’s. Weren’t you one of the Credit Rating Agencies (CRA) heavily criticsed by the Federal Reserve in the USA and Bank of England for the part you played in the global credit crunch? How expert and reliable are your ratings? Big question marks people, big question marks!!!

End of comments.



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