SA Major Banks to Expand Loss-Absorbing Capacity from 2026 –Fitch
South Africa’s domestic systemically important banks (D-SIBs) are set to increase their loss-absorbing capacity by issuing new loss-absorbing debt (FLAC) from 2026, Fitch Ratings says in a new report.
Recall that the South African Reserve Bank (SARB) recently finalised the prudential standard on a new loss absorbing debt class (FLAC), which is being implemented as part of the resolution framework for financial institutions, adopted in 2023.
FLAC is designated for loss absorption and conversion to regulatory capital during bank resolution. It ranks senior to shareholders’ equity and other regulatory capital instruments but is subordinated to all unsecured liabilities.
The loss absorbing debt resolution buffer requirements will be phased in over six years from 1 January 2026 (instead of January 2025, as originally targeted). This will be an important step in developing an efficient resolution regime in South Africa.
Analysts said the standard should help to ensure that systemic financial institutions have sufficient capacity to absorb unexpected losses and can continue to operate.
In a note, Fitch said FLAC buffers are an important part of South Africa’s bank resolution framework and should improve banking sector resilience.
FLAC resolution buffer requirements will be phased in over six years, giving banks time to plan their capital needs and to test the market response to the new debt class., the rating agency added.
The South African Reserve Bank has estimated that the ultimate FLAC resolution buffer requirements would nearly double D-SIBs’ total loss-absorbing capacity to 17.6% of their combined risk-weighted assets.
“We expect FLAC issuance to partially replace maturing senior unsecured debt at the D-SIB or holding company level. Issuance is likely to be targeted to domestic investors in local currency, but could be extended to external creditors if demand is sufficient, and foreign-currency placements may be possible”.
Fitch-rated D-SIB groups had qualifying junior debt buffers of about 3% of their consolidated RWAs at end-1H24, and the average total buffer, including outstanding senior debt at holding companies, was 4%–8% of each D-SIB’s standalone risk-weighted assets, materially below the 10% threshold for the possibility of ratings uplift.
Given the long phase-in period for FLAC requirements, Fitch analysts said they do not expect FLAC issuance to lead to ratings uplift for any of the banks until at least 2028.
Even then, Fitch analysts said they would only consider a FLAC-driven upgrade if viewed a group’s junior debt buffers as sufficient to prevent a default on senior debt in the event of a sovereign default, as the banks’ ratings are already level with the South African sovereign rating (BB-/Stable). #SA Major Banks to Expand Loss-Absorbing Capacity from 2026 –Fitch#
