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South African banks to see limited fallout from debt downgrades

‘Junk grade isn’t a death sentence,’ says Wayne McCurrie.
Image: Moneyweb

South African lenders are likely to suffer limited fallout from the country’s descent deeper into junk after Moody’s Investors Service and Fitch Ratings lowered their credit assessments last week.

Finance Minister Tito Mboweni said on Saturday the downgrades and negative outlooks will knock borrowing costs while urging the government to implement “much-needed structural economic reforms.” Bank ratings are capped at the level of the sovereign, which means the likes of Standard Bank Group and FirstRand will see their ratings fall.

“Sadly, the downgrades mean higher interest rates which perversely helps the banks’ margins, but also increases the risk of bad debts,” said Kokkie Kooyman, a portfolio manager at Denker Capital. “It will force South African corporates to increasingly invest capital outside South Africa — and the banks are well placed to facilitate this.”

Where banks may face subtle difficulty is among their pan-African franchises, said Jones Gondo, a credit research analyst at Nedbank Ltd.

“They used to be able to fund themselves cheaper than many African sovereigns and then compete in dollar-lending to corporates and sovereigns across the continent,” he said. “This becomes harder to do now.”

Still, the overall effect of the downgrades on banks and the wider market is negligible, said Wayne McCurrie, a portfolio manager at FNB Wealth and Investments.

“It’s a long route back to investment grade,” McCurrie said. “But junk grade isn’t a death sentence.”

© 2020 Bloomberg

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There’s more to this than the price of banks’ funding – it is also going to reduce availability as most large international lenders allocate limits on the basis of a ratings matrix. The lower the rating, the lower the limit and some banks are simply not prepared to lend to a borrower with such a low rating. Once the rating dips below a certain level Credit Committees will demand higher levels of oversight such as six monthly reviews which will discourage lenders without large coverage teams. This problem is much bigger than simply the price.

Interesting
International institutional investors such as pension funds are prevented by law to invest in SA and any country with a sub-investment grade. So these funds must have already been taken out of the country – wonder how much it was ..
And regarding everyone criticising the SARB for keeping interest rates the same in stead of cutting it last week, the decision was an investor-friendly one; SA is one of the few remaining countries where overseas investors can still earn interest on their money- in Europe and the US the rate is zero (negative.)

Most of the countries will get closer to junk status due to covid19 except the USA because all three ratings agencies reside in the USA.

Even if they have the highest covid19 infections in the world.

Even when they did such a poor job of controlling the covid19 virus.

Subsequent to this article the SARB said SA banks ARE at far greater risk due to their close links to the Sovereign via government guarantees! So the banks’ exposures to SOEs SAA, Eskom, Denel, etc, does increase risk for the traditional banks who hopped into bed with the ANC government, backing loss-making ideology behind SAA and other disasters!
By the way, did the banks get their SAA guarantees repaid recently via the business rescue process? Is that cash in the bank yet from Treasury?

End of comments.

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