The South African Reserve Bank (SARB) reiterated that South African banks are adequately capitalised to deal with the effects of a cut from Standard & Poor’s (S&P) to a sub-investment grade.
The ratings agency lowered the ratings of seven of commercial banks, which include Nedbank, Absa, Investec and FirstRand to sub-investment grade. This follows the downgrading South Africa’s foreign currency denominated debt to sub-investment grade.
“The sovereign rating acts as a ceiling and the rating of banks cannot be above that of a sovereign,” said the SARB.
S&P said banks cannot be rated higher than the country’s foreign currency sovereign credit rating, which it downgraded to junk status last Thursday.
“This is because of the likely direct and indirect influence of sovereign distress on domestic banks’ operations, including their ability to service foreign currency obligations,” S&P said in a statement.
The SARB explained that South African banks were last year subjected to a common scenario stress test, including a macroeconomic scenario that entailed excessive financial market volatility and risk aversion.
“The results of the stress test showed South African banks to be adequately capitalised to withstand significantly adverse scenarios. The resilience of the banks stems from the high capital buffers that prevail in the South African banking system.”
The SARB said overall, the South African financial system remains healthy, robust and resilient despite some headwinds caused by elevated levels of domestic economic, financial and political events, as well as global financial market volatility.
SARB Deputy Governor Daniel Mminele said last week S&P’s sub-investment grade rating is a serious setback for the country.
“We will now need to redouble our efforts in providing assurance and communicating continued commitment to sound macro-economic policies and their consistent and predictable implementation, so as to reverse the current ratings trajectory.”
Mminele said this will require a continued collaborative effort between the government, business and labour to boost domestic and international investor confidence.
He noted that financial markets will likely need more time to fully process recent political events and their economic consequences.
“It remains to be seen whether the recent market developments represent a reassessment or a repricing of the South African credit. It is similarly too early to draw any firm conclusions on how these developments will affect SARB’s own inflation forecasts.”