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African Bank Contagion Limited for Large SA Banks

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, Fitch Ratings says. It does not change our view of the credit profiles of the largest five banks, so there are no rating changes.

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. But 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 GDP growth and the high level of household debt.

The Negative Outlooks on Standard Bank, FirstRand, Nedbank and Absa Bank reflects that of the South African sovereign. Investec’s Outlook is Stable because it focuses on high net-worth 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.

Our view 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. The five banks 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.

We do not consider African Bank to be systemically important and the resolution of African Bank does not change our approach to factoring in state support for South Africa’s systemically important banks, which have significant deposit franchises. Nevertheless, in the context of our review of state support for banks globally, we announced in March 2014 that we believe the propensity to support banks is reducing in South Africa with the impending adoption of resolution legislation. But a moderate likelihood of support for systemically important banks will remain.

We do not believe this reducing willingness to support will increase the probability of default for the large banks at current rating levels, which are one or two notches above ’BB+’ Support Rating Floors (where applicable). It is likely that the SRFs will be revised to ’BB-’ in late 2014 or in 1H15 to acknowledge a broader range of resolution tools becoming available to the authorities.

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 ZAR7bn (USD653m) 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.

We expect to publish a peer review report for South African banks next week.

Fitch , August 2014

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