Impact of African Bank’s Failure Limited, says Fitch
The recent failure and bail-in of African Bank Limited is isolated and any contagion to the large South African banks is likely to be limited, says Fitch Ratings. The credit ratings agency (CRA) adds that it has not changed its view of the credit profiles of the largest five banks, so there are no rating changes.
Fitch reports that Absa Bank, FirstRand, Nedbank, Standard Bank and Investec have ‘bbb’ range viability ratings, reflecting strong domestic franchises, which underpins stable core earnings, sophisticated risk management, and acceptable liquidity and capitalisation.
However, their ratings are effectively capped by South Africa’s deteriorating operating environment since performance and asset quality are vulnerable to the weakening economy. Profitability and asset quality will be affected by slow gross domestic product (GDP) growth and the high level of household debt.
The negative outlooks on Standard Bank, FirstRand, Nedbank and Absa Bank reflect that of the South African sovereign. Investec’s outlook is Stable because it focuses on high net-worth (HNW) and professional clients and is less sensitive to the general weakening of the broader consumer and it is not currently constrained by the sovereign rating.
Fitch’s belief that the fallout from African Bank’s resolution will not be material is underpinned by the small exposures the large five banks have to the failed lender. They are part of the consortium underwriting new capital in the good bank being created, but the commitment is not significant relative to each participant bank’s capital or balance sheet.
The CRA does not consider African Bank to be systemically important and the resolution of African Bank does not change its approach to factoring in state support for South Africa’s systemically important banks, which have significant deposit franchises.
African Bank was put into resolution by the South African Reserve Bank on 10 August, which included keeping retail depositors whole (despite no deposit insurance in South Africa), paying 7bn rand (ZAR) (US$653m) for a bad-loan book, a ZAR10bn capital raising in the private sector and a voluntary 10% haircut for senior debt instruments and wholesale deposits opting to move to the good bank.