Who would have thought South Africa’s big four banks would get a credit downgrade after the African Bank collapse? After all, they shrugged off the cataclysmic financial events of 2008.
This week’s downgrading of these banks by rating agency Moody’s has led even the staid Reserve Bank to question its rationale. Moody’s downgraded African Bank to sub-investment grade in May, but raised no flags suggesting imminent collapse. Tuesday’s one-notch downgrades of the big four – Nedbank, Standard Bank, FirstRand and Barclays’s Absa – were preceded by a two-notch cut for the smaller Capitec, with which the Reserve Bank also took issue. But the downgrades seem to have less to do with the health of our banks or the stability of our financial system and more to do with the Reserve Bank’s recipe to rescue African Bank.
Along with splitting African Bank into a “good” and a “bad” bank, the Reserve Bank essentially forced senior creditors such as bondholders to take a 10% cut in the value of their investment. This helps to spread the pain but has irked some senior creditors. The move is in line with the international trend to “bail in” rather than “bail out”, in which nations and their taxpayers underwrite the costly rescue of financial institutions supposedly “too big to fail”.
Moody’s sees the Reserve Bank as willing to impose losses on creditors, which has to be taken into account in its ratings. The “bail-in”, however, could be seen as a lifeline: African Bank’s debt was trading at a 40% discount after the shock trading update that sparked its share price collapse. Our banks, Capitec included, say their financials do not justify a downgrade.
The African Bank rescue seeks to spread responsibility for losses and provide a way to recapitalise the bank, but it is not surprising that at least one ratings agency sees greater risk in the South African market.