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Fitch Ratings is one of two credit rating agencies that recently announced that South Africa would be downgraded for the second time this year. (Photo: Getty Images / Gallo Images)
- The Fitch rating agency has upgraded the ratings of five large South African banks.
- Fitch believes that the solvency of banks has improved and that their capital ratios are sufficient to overcome the current economic crisis caused by the coronavirus.
- This comes after Fitch downgraded South Africa’s sovereign rating to trash a month ago.
- For more stories, go to www.BusinessInsider.co.za.
In a surprising turn of events, rating agency Fitch raised its rating on five major South African banks, just one month after plunging South Africa further into junk territory.
Fitch now rates the country’s government bonds three notches below investment grade, warning last month that the local economy “is expected to remain below 2019 levels even into 2022.” Fitch was the first rating agency to downgrade South Africa’s rand-denominated government bonds to junk in 2017.
Fitch downgraded local banks to “BB” at the start of the lockdown in March, and downgraded their ratings further when it downgraded South Africa last month.
Banks have seen a perfect storm of a huge surge in bad debt as lockdowns and drawdowns hit clients’ ability to pay, along with decades-low interest rates, hurting their profit margins. Banks have been reporting large debt impairments in recent months and have withheld dividends.
But Fitch says banks still have significant room to withstand current pressures on the operating environment.
“The company profiles, management and strategy of South African banks, and the appetite for risk remain key strengths. Their capital ratios continue to show comfortable reservations about regulatory requirements and we expect them to remain broadly stable despite current pressures on asset quality and earnings. In addition, the banks’ strong liquidity and financing profiles benefit from major national franchises, supported by large customer deposit funding bases and limited dependence on external funding, ”the agency said in a statement.
READ | South African banks are reporting bad debt bloodbath, but it may look worse than it actually is
Kokkie Kooyman, a portfolio manager at Denker Capital, said Fitch’s measure reflects that banks have managed to raise enough provisions and that their capital ratios are sufficient to weather the current storm.
While the banks have been reporting large deteriorations, not all of this money will have to pay off in the end. This is because the new standard called IFRS 9 requires banks to make provisions for large impairments on higher risk loans, in the event of default. Much of the massive impairments that banks report are the result of IFRS 9, and not all of the money will have to be written off, Kooyman previously told Business Insider.
But while banks have received an upgrade in ratings and now have a much better credit rating than South African government bonds, this does not mean that the latter will rise anytime soon.
“Due to our very high debt-to-GDP ratio, I cannot see our sovereign rating going up until the government takes significant steps to cut spending, while creating opportunities for economic growth and reducing debt through the sale of assets. state, “Kooyman said. .
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