South Africa: banks impacted by the country’s sovereign rating

After downgrading South Africa’s sovereign rating from “BB” to “BB-” on November 20, Fitch has just downgraded the long-term issuer default ratings (IDRs) of five South African banks. These are Absa Bank Limited, FirstRand Bank Limited, Investec Bank Limited, Nedbank Limited and The Standard Bank of South Africa Limited which also saw their ratings slide to “BB-” from a “BB” previously. The outlook remains negative.

The rating actions also affected four South African bank holding companies – Absa Group Limited, Investec Limited, Nedbank Group Limited and Standard Bank Group Limited. All international debt ratings have also been downgraded.

For the rating agency, South African banks are suffering from the high concentration of their activities and significant sovereign exposure of between 175% and 245% of banks’ capital at the end of June 2020. The ratings also reflect the country’s reduced capacity to provide them with support, when needed, due to a weakening fiscal position.

The South African economy is suffering heavily from the negative effects of the Covid-19 pandemic which has taken its toll on asset quality and bank profits. The is expected to contract 7.3% in 2020 and recover to 4.8% in 2021 given base effects. “We believe that the trend GDP growth will remain around 1.5%, and there are risks that the lasting effects of the pandemic weigh more on growth,” notes Fitch.

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