November 13, 2009 - By Mzwandile Jacks
Five South African banks had their bank financial strength ratings downgraded by Moody's Investors Service, which said yesterday this reflected the crumbling operating and macroconditions of banks' financial fundamentals.
The downgrading of Absa, FirstRand, Investec, Nedbank and Standard Bank reflected a slowdown in business growth and more challenging funding conditions, it said.
Mardig Haladjian, the general manager of financial institutions at Moody's in Cyprus, said South Africa had been resilient to the global crisis.
"But weakening macroeconomic conditions - including an estimated gross domestic product contraction in 2009 of 2 percent - is exerting additional pressure on the banking sector's financial fundamentals and... on banks' asset quality and profitability indicators," Haladjian said.
Constantinos Kypreos, a senior bank analyst at Moody's Cyprus, said operational conditions had become tougher than they used to be and this had affected the banks' asset quality.
"Non-performing loans have increased substantially in the past two years, having a huge impact on profitability of these institutions."
According to Moody's, the ratio of impaired advances to gross loans had increased from 2 percent in January this year to 5.8 percent in August.
The asset quality deterioration had necessitated a substantial increase in provisioning charges, which for the five affected banks had more than trebled over the past two years.
Kypreos said Moody's rating action also captured the challenges faced by South African banks in their efforts to diversify and lengthen their funding profile.
"It is currently very difficult for the banks to diversify their funding profiles," he said.
But Moody's acknowledged the banks had maintained adequate liquidity levels while building up their capitalisation ratios (with a tier 1 ratio of 10.6 percent as of August).
FirstRand director of investment relations Sam Moss said Moody's rating was now more in line with that assigned by other major rating agencies.
Simon Ridley, the financial director of Standard Bank, said there was no surprise in the rating change as the group had been placed in negative review from July.
Don Bowden, of the tier 1 investor relations for Nedbank, said: "We are looking strong. Deposits are flowing well into the banks and capital has got even stronger."
Absa's Patrick Wadula had not given a response at the time of going to press.