Johannesburg, 10 July 2020 – GCR Ratings (“GCR”) has downgraded Standard Bank of South Africa’s unsolicited international scale long term issuer rating to BB, from BB+, due to changes in the country and sector risk scores, with a Stable Outlook. At the same time, GCR has affirmed the unsolicited South African scale long term and short term issuer ratings of AA+(ZA)/A1+(ZA). The Outlook is Negative.
|Rated Entity||Rating class||Rating scale||Rating||Outlook/Watch|
|Standard Bank South Africa Limited||Long Term issuer||National||AA+(ZA)||Negative|
|Short Term issuer||National||A1+(ZA)||–|
|Long term issuer||International||BB||Stable|
The rating action follows a reduction in the South African country and financial institutions sector risk assessments.
- On June 24, 2020, the South African Financial Institutions sector risk score was lowered to 7.5, from 8.0 previously. Click here to access link.
- The South African country risk score was also lowered to 7.0, from 7.5 previously, in a market alert released on the 27th May 2020. Click here to access link.
Combined, the above country and sector risk scores comprise the operating environment score, which is a key input into GCR’s ratings.
In line with other major South African Banking groups, Standard Bank of South Africa’s (“SBSA”) national scale rating has been placed on Negative outlook, reflecting the highly strained operating environment in the core market. While credit losses are likely to be aligned to that of peers, there is a broadly negative trend across the entities core markets, which will weigh down asset quality and pressurise earnings and capitalisation. While the international scale rating has been downgraded on the back of the lower operating environment score, GCR believes that there is sufficient headroom in the current rating to maintain a stable outlook on the international scale rating.
The unsolicited ratings of SBSA is based on the credit profile of Standard Bank Group Limited (“the group”). SBSA is regarded as the core operating entity within the group and accounts for just over 70% of group loans and advances. The operating environment score is a blend of the core South African and other regional markets with GCR viewing the latter to carry higher risks that moderates the overall operating environment score.
The group’s credit profile is underpinned by its strong competitive position, being one of the largest financial services companies across the continent and holding a market leading position in the core South African banking arena. Capital, risk, funding and liquidity are broadly in line with market norms, and are slightly positive to the ratings on balance.
The group’s credit strength is derived from its strong competitive profile, including leadership position in the South African market and good levels of regional dispersion, supporting risk diversification. The group also provides a broad range of products which is further refined into different business segments and sub segments, including partnerships with large non-bank financial institutions that adds another layer of income diversification. These are important building blocks for long term revenue stability (particularly in stressed market conditions), and positively impacts the rating, with a competitive positioning score above the major peer grouping.
The group is adequately capitalised, with a Common Equity Tier 1 (“CET 1”) ratio of 12.9% at 1Q F20, slightly better than the industry and peer average. As such, while we anticipate a steep contraction in earnings (on the back of multiple interest rate cuts, higher credit losses and reduced commission and fee income due to lower transaction volumes), we think the banks loss absorption capacity will still be good. No dividends are expected to be paid out of over the remainder of the year, and asset growth will be contained as initially strong credit uptake in the first half of 2020 (broadly to support individuals and SME’s to manage liquidity during lockdown periods) are likely to taper off in the second half of the year, and the bank will maintain prudent underwriting control over new extensions and benefit from risk sharing on COVID related lending. Combined, this will serve to preserve capital and GCR believes the group has a relatively high tolerance to the current stress, with the GCR capital ratio expected to compare favourably to peers, ranging from 12.5%-13% across the group.
Asset quality is expected to come under severe pressure in 2020 as strained economic activity across core markets will likely see a deterioration in corporate earnings (across most business sectors) and household debt affordability. Based on recent performance guidance, credit losses are projected to spike to levels not seen since the global financial crisis, ranging from 1.7%-2.0% over the short to medium term.
Given the onset of COVID-19, it is probable that utilisation of committed facilities to borrowers will have increased. However, funding and liquidity pressure will be somewhat contained, as some drawdowns on facilities could be pre-emptive, with funds being deposited until required, while risk aversion could see more deposit inflows from higher risk asset classes (such as equity). On balance, a slight negative impact is expected, but viewed to be manageable as current liquidity buffers are good with the Liquidity Coverage Ratio (“LCR”) sitting comfortably above the regulatory minimum (group LCR as at 1Q was 141.9%), with the core South African subsidiary’s LCR tracking in line with the industry average.
In line with other major South African Banking groups, SBSA’s national scale rating has been placed on Negative outlook, reflecting the highly strained operating environment in the core market. While credit losses are likely to be aligned to that of peers, there is a broadly negative trend across the entities core markets, which will weigh down asset quality and pressurise earnings and capitalisation. While the international scale rating has been downgraded on the back of the lower operating environment score, GCR believes that there is sufficient headroom in the current rating to maintain a stable outlook on the international scale rating.
Should credit losses rise significantly above expectations and industry peers, the rating will be downgraded as this will also impede capital generative capacity and constrain risk based capital adequacy. The international scale rating could also be lowered if the country risk of South Africa deteriorates, most likely due to the weakening position of its sovereign. A reversion to a stable outlook on the national scale could arise on the back of better than expected credit losses, or sustained GCR capital ratio above 12% over the outlook horizon which would reflect adequate capital generative capacity to absorb the peak of the anticipated shocks.
|Primary analyst||Vinay Nagar||Senior Financial Institutions Analyst|
|Johannesburg, ZA||Vinay@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Financial Institutions, May 2019|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, May 2020|
|GCR Financial Institutions Sector Risk Score, June 2020|
Standard Bank of South Africa Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term issuer||Initial||National||AA(ZA)||Stable||June 2001|
|Short Term issuer||Initial||National||A1(ZA)||N/a||June 2001|
Risk score summary
|Rating Components & Factors||Risk scores|
|Country risk score||6.50|
|Sector risk score||7.50|
|Management and governance||0.00|
|Capital and Leverage||(0.50)|
|Funding and Liquidity||0.00|
|Balance Sheet||Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks|
|Income||Money received, especially on a regular basis, for work or through investments.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Long Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have not been disclosed to Standard Bank of South Africa. The ratings were unsolicited, and therefore, GCR has been not been compensated for the provision of the ratings.
Standard Bank of South Africa did not participate in the ratings process, however the quality of public disclosure from audited accounts and risk management booklets, alongside regulatory returns, meets out information sufficiency requirements.