Standard Bank Rating Slides to Speculative with Negative Outlook
Fitch Ratings has affirmed Standard Bank Group Limited’s (SBG) and its main operating subsidiary the Standard Bank of South Africa Limited’s (SBSA) Long-Term Issuer Default Ratings (IDRs) at ‘BB-‘saying outlooks are negative.
In its latest rating note, Fitch said the IDRs and National Ratings are driven by the entities’ standalone creditworthiness, as expressed by their ‘bb-‘ Viability Ratings (VR).
The financial service group viability rating is equalised with its consolidated risk profile, which Fitch said reflects acceptable double leverage at the end of 2020 at 107%, as well as high capital and liquidity fungibility within the group.
Fitch noted that SBSA represents the dominant part of SBG, accounting for 64% of total assets at end of the first half of 2021 (1H21) and therefore its viability ratings is also aligned with SBG’s consolidated risk profile.
The Long-Term IDRs and VRs of both entities are constrained by the South African sovereign rating which is at BB- also with a negative out, reflecting the concentration of their activities in the country and high sovereign-related exposure relative to equity at around 1.9x for Standard Bank South Africa in August 2021.
The negative outlooks on their Long-Term IDRs reflect that on South Africa’s rating, Fitch added in the report.
“Our operating environment assessment for South African banks is also constrained by the sovereign rating, which in turn is constrained by low trend growth among others, despite a strong expected recovery in GDP of 5.3% in 2021, supported by the easing of lockdown restrictions and higher commodity prices”.
Fitch hinted that tight public finances and electricity shortages will hold back growth 2022 forecast of 2.1% in SA, while global factors and the risk of new containment measures pending a possible fourth wave of infections may also weigh on the recovery of some sectors, including hospitality and tourism.
It considered that fragile business and consumer confidence, very high unemployment which printed at 34% and increasing social and political risks also weigh on operating environment assessment.
SBG has a leading domestic franchise through Standard Bank South Africa, which represented 24% of South Africa’s banking system assets in August-2021, and investment management and life insurance subsidiary, Liberty Holdings Limited, Fitch said.
The ratings also noted that SBG has a leading sub-Saharan African franchise through its Africa Regions business, with operations spanning 19 countries outside South Africa.
SBG’s impaired loans (Stage 3 loans under IFRS 9) ratio increased significantly to an above-peer-average 6.2% at end-2020 from 4.2% at end-2019, as a result of pandemic pressure primarily relating to personal and business lending in South Africa.
However, the ratings spotted that pressures somewhat receded in 1H21 with the economic rebound, although the impaired loans ratio rose slightly to 6.3% at end-1H21.
“We consider specific loan loss allowance coverage of impaired loans (47% at end-1H21) only adequate in view of collateral coverage. Debt relief loans represented just 0.4% of gross loans at end-1H21”, it said.
SBG delivers strong profitability, as indicated by operating returns on risk-weighted assets, which have averaged 3.5% over the past four full years. Revenues exhibit strong diversification by geography and business line.
Fitch said while operating returns on risk-weighted assets came under pressure in 2020 at 1.8% from a significant increase in loan impairment charges, margin pressure stemming from the lower interest rate environment and a net loss at Liberty, this ratio recovered to 2.9% in 1H21 (annualised basis), partly due to lower LICs.
It noted that LICs, equal to a high 48% of pre-impairment operating profit. However, it said regulatory capital ratios exhibit comfortable buffers above required minimums.
SBG’s common equity Tier 1 (CET1) capital ratio -excluding unappropriated profits- declined slightly to 12.5% at end-1H21 from 12.8% at end-2019, but remains at the higher end of the peer group.
Impaired loans net of specific loan loss allowances represented a material 25% of CET1 at end-1H21, Fitch said.
It added that the bank pre-impairment operating profit, which has averaged 4.7% of average gross loans over the past four full years, provides a sizeable buffer to absorb loan impairment charges through the income statement without affecting the capital.
SBG has limited reliance on external and foreign currency funding, according to Fitch Ratings.
However, the report said the bank has a strong domestic deposit franchise but the deposit base is characterised by a lack of direct retail deposits, which is a structural feature of South Africa’s banking system.
SBG’s loans to customer deposits ratio improved to 88% at end-1H21 from 102% at end-2019 as a result of strong deposit growth, Fitch stated. it added that liquidity coverage ratio of 141% at end-1H21 and a net stable funding ratio of 125% at end-1H21 are comfortably above minimum requirements.
“The affirmation of SBG and SBSA’s National Ratings with Stable Outlooks reflects our view that their creditworthiness in local currency relative to other South African issuers is unchanged”.
SBSA’s senior unsecured debt is rated in line with its IDRs as the likelihood of default on these obligations reflects the likelihood of default of the entity.
As a bank holding company, SBG’s senior unsecured debt is rated one notch below its Long-Term IDR for loss severity, reflecting below-average recovery prospects due to thin qualifying junior debt (QJD) buffers.
SBG’s subordinated debt is rated two notches below its VR for loss severity, reflecting poor recovery prospects. Criteria including a sufficient QJD buffer are not met for alternative notching. #Standard Bank Rating Slides to Speculative with Negative Outlook
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