South African banks to see limited fallout from debt downgrades

South African lenders are likely to suffer limited fallout from the country’s descent deeper into junk after Moody’s Investors Service and Fitch Ratings lowered their credit assessments last week.

Finance Minister Tito Mboweni said on Saturday the downgrades and negative outlooks will knock borrowing costs while urging the government to implement “much-needed structural economic reforms.” Bank ratings are capped at the level of the sovereign, which means the likes of Standard Bank Group and FirstRand will see their ratings fall.

“Sadly, the downgrades mean higher interest rates which perversely helps the banks’ margins, but also increases the risk of bad debts,” said Kokkie Kooyman, a portfolio manager at Denker Capital. “It will force South African corporates to increasingly invest capital outside South Africa — and the banks are well placed to facilitate this.”

Where banks may face subtle difficulty is among their pan-African franchises, said Jones Gondo, a credit research analyst at Nedbank Ltd.

“They used to be able to fund themselves cheaper than many African sovereigns and then compete in dollar-lending to corporates and sovereigns across the continent,” he said. “This becomes harder to do now.”

Still, the overall effect of the downgrades on banks and the wider market is negligible, said Wayne McCurrie, a portfolio manager at FNB Wealth and Investments.

“It’s a long route back to investment grade,” McCurrie said. “But junk grade isn’t a death sentence.”

© 2020 Bloomberg