Junk Rating, Virus Hit South African Banks Trapped in Recession

Roxanne Henderson, Bloomberg News

(Bloomberg) --

As if an all-but-dead economy wasn’t enough, South African banks must now navigate a downgrade in the nation’s credit-rating to junk just as the coronavirus sinks any chance of a recovery.

Banking stocks slid with the rand and local bonds on Monday after the continent’s most industrialized economy lost its last investment-grade rating from Moody’s Investors Service, which maintained a negative outlook. The coronavirus pandemic means the country, already trapped in a recession, is heading into likely global downturn already vulnerable.

“The downgrade predominantly impacts funding of the banks,” said Nolwandle Mthombeni, an investment analyst at Mergence Investment Managers in Cape Town. “In the event that capital levels are lower as a result of the coronavirus, the big four banks will require more funding in the near term and will all be impacted.”

What Bloomberg Intelligence Says

South African banks are likely facing a spike in credit impairments, as the economic impact of the spread of coronavirus takes hold, mitigated to a degree by lower policy rates. Each 20 basis-point impairment rise could take 6-8% off 2020 profit. A doubling in charges would wipe out 20-30% profit.

-- Philip Richards, senior industry analyst

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While South African banks are well capitalized, profitable and industry regulators have relaxed some rules to help cushion the blow from Covid-19, they face a potential margin squeeze between the money they borrow and what they lend, said Lester Davids, a trading desk analyst at Unum Capital.

Standard Bank Group Ltd. is probably best placed because the continent’s biggest lender has the largestfootprint, giving it a diversified earnings base, Davids said. Worst-off might be Nedbank Group Ltd. because of the company’s large exposure to the property sector, which is also experiencing significant pressures as retailers close shops and battle to make rental payments, he said.

The six-member FTSE/JSE Africa Banks Index tumbled as much as 6% on Monday, extending Friday’s 12% slump.