South Africa's banks may have been downgraded, but they're still performing strongly - and recruiting
The contrast, if not conflict, between rating agencies and banks in Europe and the US is being ‘exported’ toSouth Africa, in a development which is causing some controversy. This week Moody’s Investors Service downgraded by one notch the senior debt and deposit rating of South Africa’s top banks, the so-called ‘big five’: Standard Bank, Absa, FirstRand, Nedbank and Investec.
The downgrades, Moody’s said, “reflect the impact of the country’s increasingly constrained public finances and our view that authorities would face challenging policy choices if multiple institutions were to need its financial support at the same time” rather than a deterioration in the financial strength or financial performance of the five banks in question. The agency is worried about the unemployment rate of 23.9%, high debt levels and the budget deficit. On the positive side, official data this week showed the economy grew 3.2% in the last three months of last year.
Moody’s downgrade has been received with some bafflement in South Africa. “We seriously disagree with the assessment,” Finance minister Pravin Gordhan said, calling the rating agency “schizophrenic”. The South African Reserve Bank was less blunt but equally clear: “SA banks are sound, well capitalized and profitable. The five banks weathered the global financial crisis well and have no exposure to the Sovereign debt crisis of certain troubled European countries,” it said in a statement.
“I see it as a defensive measure by Moody’s to avoid further flak in the event of Greece leaving the Euro, especially as South Africa conducts a third of its trade with Europe,” says Walter Ankrah, head of African financial services at executive search group New Millennium Group. “All credit rating agencies have taken an overall bearish stance ever since the criticism they endured over the financial crisis, so they are placing more emphasis on macro-economic factors that they say could constrain the SA government’s ability to bail out the big five in the event of another global financial crisis.”
South African banks are among the world’s best-regulated and most capitalised and no bank has needed a bailout during the financial crisis. In fact, in the last few days the banks in question have all announced strong earnings growth of over 20% and confirmed a positive outlook for the months ahead. Absa was the first to release its half-year results, which were above expectations and showed 21% growth in earnings boosted by a 33% increase in retail earnings. Absa, which is controlled by Barclays, now plans to grow its corporate banking franchise.
FirstRand was second with an increase in earnings of 26% in the last six months of 2011, driven by both its retail arm, First National Bank, and by its investment unit, Rand Merchant Bank. Nedbank yesterday reported a 26.2% increase in annual earnings and said it has taken on many new corporate clients and added 425,000 retail clients. As a result, profits will increase further in 2012, CEO Mike Brown said, and Nedbank plans to take a 20% stake in Ecobank, its African partner. Standard Bank, which announces its results on March 8th, has already said that annual earnings are up by around 20 per cent.
All banks plan to use their strong balance sheets to expand and recruit both in South Africaand in other African countries. “Earnings growth of more than 20% looks very solid in the current market conditions,” says Patrice Rassou, head of equities research at Sanlam Investment Management. “All the big banks are showing decent growth and the international context is also helping because last year people were worried about a double-dip recession, which has not come.”
