In a surprise move, Fitch upgraded South Africa's banks - here's why

Business Insider SA
(Photo: Getty Images/Gallo Images)
Fitch Ratings is one of two credit-rating agences that recently announced South Africa would be downgraded for the second time this year. (Photo: Getty Images/Gallo Images)
  • The ratings agency Fitch has upgraded the ratings of five big South African banks.
  • Fitch believes that banks' creditworthiness has improved and that their capital ratios are enough to see them through the current economic crisis brought on by the coronavirus.
  • This comes after Fitch cut South Africa's sovereign rating deeper into junk a month ago.
  • For more stories, go to

In a surprising turn of events, the ratings agency Fitch boosted its rating of five big South African banks – only a month after cutting South Africa even deeper into junk territory.

Fitch now rates the country’s government bonds three levels below investment grade, warning last month that the local economy “is expected to remain below 2019 levels even in 2022”. Fitch was the first rating agency to downgrade South Africa's rand-denominated government bonds to junk, in 2017. 

Fitch downgraded local banks to “BB” at the start of the lockdown in March, and lowered their ratings even further when it cut South Africa deeper into junk last month.

Bank have seen a perfect storm of a large spike in bad debts as lockdowns and retrenchments hit customers’ ability to repay, along with decades-low interest rates, which hurt their profit margins. The banks have been reporting large bad-debt impairments over recent months, and have withheld dividends.

But Fitch says the banks still have significant headroom to withstand current pressures on the operating environment.

“The South African banks' company profiles, management and strategy, and risk appetite remain key strengths. Their capital ratios continue to display comfortable buffers over regulatory requirements and we expect them to remain broadly stable despite current pressures on asset quality and earnings. Furthermore, the banks' solid funding and liquidity profiles benefit from leading domestic franchises, underpinned by large customer-deposit funding bases and limited external funding reliance,” the agency said in a statement.

READ | SA banks are reporting a bad-debt bloodbath - but it may look worse than it really is

Kokkie Kooyman, portfolio manager at Denker Capital, said Fitch’s move reflects that banks have managed to raise enough provisions and that their capital ratios are enough to see them through the current storm.

While the banks have been reporting large impairments, not all of this money will have to be written off in the end. This is because the new so-called IFRS 9 standard requires banks to make provisions for large impairments on higher-risk loans – in case they default. Much of the massive impairments that banks are reporting are a result of IFRS 9, and not all of the money will have to be written off, Kooyman previously told Business Insider.

But while the banks have received a ratings upgrade, and now have a much better creditworthiness grade than South African government bonds – this does not mean the latter will be upgraded soon.

“Due to our very high debt to GDP ratio, I cannot see our sovereign rating being upgraded until the government takes meaningful steps to cut expenditure, at the same time creating opportunity for economic growth and reducing debt by selling off state assets,” Kooyman said.  

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