S&P: South Africa Banking Industry Country Risk Assessment Maintained At Group 5

News release from Standard & Poor’s
22 January 2010
 
S&P: South Africa Banking Industry Country Risk Assessment Maintained At Group 5

 
    -We are maintaining our Banking Industry Country Risk Assessment (BICRA) on South Africa at Group 5.
    -South Africa’s BICRA reflects the banking system’s stable competitive structure and sound financial regulation, offset by the country’s wide social and economic inequalities and     -banks’ vulnerability to deterioration in the quality of loans to households.
    -Our estimation of gross problematic assets in a prolonged economic downturn is affirmed at 10%-20%.
    -The improvement in the economic risk score to five reflects primarily the banking system’s relative lack of exposure to external events in 2008 and 2009.

LONDON Jan. 22, 2009–Standard & Poor’s Ratings Services said today that it maintained its Banking Industry Country Risk Assessment (BICRA) on the Republic of South Africa (local currency A+/Negative/A-1, foreign currency BBB+/Negative/A-2) at Group 5. At the same time, we also maintained our estimation of gross problematic assets (GPAs) at 10%-20%. Furthermore, the economic risk score was revised upwards to five from six (out of 10), primarily reflecting the South African banking system’s relative lack of exposure to external events in 2008 and 2009.

The BICRA reflects the strengths and weaknesses of a country’s banking system relative to other countries (out of 10, one is the strongest). (For a complete list of BICRA groups see “Banking Industry Country Risk Assessments,” published on Jan. 8, 2010, on RatingsDirect.) Other countries in the same BICRA group as South Africa include Bahrain (A/Stable/A-1), Poland (local currency A/Stable/A-1, foreign currency A-/Stable/A-2), Kuwait (AA-/Stable/A-1+), and Brazil (local currency BBB+/Stable/A-2, foreign currency BBB-/Stable/A-3).

Our view of the improvement in South Africa’s economic risk has lowered the amount of risk-weighted assets calculated in Standard & Poor’s risk-adjusted capital framework (RACF) for each bank in the system. (For more information see “Methodology And Assumptions: Risk Adjusted Capital Framework For Financial Institutions,” published April 21, 2009.)

South Africa’s BICRA score reflects our view of the banking system’s stable competitive structure, relative sound financial regulation, and the strong franchises of the major banking groups. These factors, however, are offset by our view of weaknesses in South Africa’s economic structure, including wide social inequalities, and vulnerability to deterioration in the quality of loans to households, which carry a relatively high level of debt.

The South African banking sector is dominated by four large banking groups with strong domestic franchises. In our view, this stable competitive structure, and the sound approach and good track record in bank regulation have limited the banks’ exposure to external events, including illiquidity and drop in value of asset-backed securities and volatile movements in international wholesale funding. Nevertheless, we believe South Africa hasn’t been immune to the global economic slowdown.

Throughout 2009, unemployment and corporate delinquencies continued to rise, and house prices fell by around 10% on average. Impaired advances increased to 5.85% of gross advances at Sept. 31, 2009, from 3.08% at Sept. 31, 2008. Household lending, especially mortgages, has been the largest contributor to nonperforming loans–unsurprising given the high and rising levels of household indebtedness in South Africa. Positively, levels of corporate debt remain relatively low compared to emerging market peers. We believe that in a severe and prolonged economic downturn, the cumulative GPAs of systemwide South African loans could reach 10%-20%.
This compares well to other countries in BICRA group 5.

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