Standard & Poor's Ratings Services said today that it revised its outlooks on South Africa-based FirstRand Bank Ltd. (FRB) and FirstRand Bank Holdings Ltd. (FRBH) to negative from stable following yesterday's similar rating action on the sovereign. At the same time, Standard & Poor's affirmed its 'BBB+/A-2' and 'BBB/A-2' counterparty credit ratings on FRB and FRBH, respectively.
The outlook revision follows the rating action on the sovereign and reflects the increasing short-term macroeconomic challenges, including pressure on credit, market, and currency risks in the Republic of South Africa (foreign currency BBB+/Negative/A-2; local currency A+/Negative/A-1).
"The ratings on FRB reflect its focused strategy, strong market position, sound business practices, healthy profitability, and robust risk management," said Standard & Poor's credit analyst Matthew Pirnie.
The high socio-economic challenges of operating in South Africa, a tougher economic and competitive operating environment, and the banking industry's above-average liquidity risks are constraining factors for the ratings.
FRB is wholly owned by FRBH; the fourth-largest bank holding company in South Africa. This forms the banking operations of FirstRand Ltd. (not rated), one of the largest financial services conglomerates in South Africa.
The one-notch rating differential between the ratings on FRB and FRBH reflects its bank holding company status. FRBH would not obtain the same level of protection from the South African Reserve Bank (SARB; the central bank) in a potential crisis. Furthermore, the SARB has the ability to stop payment of dividends from FRB to FRBH.
"The negative outlook on FRB and FRBH reflects growing, although manageable, macroeconomic and industry risks," added Pirnie."The ratings will go down if the ratings on the sovereign are lowered or operating challenges exceed our current expectations. However, our base case scenario is that the group's business productivity, revenue, and efficiency initiatives will help it to maintain good financial performance, despite the slowing South African economy. Capital and liquidity will be prudently managed, with no material change from current levels."
An outlook revision to stable on the sovereign would result in similar rating actions on FRB and FRBH, as long as the financial profile remains sufficient. An outlook revision back to stable will depend on improvements in the macroeconomic and financial environment, FRB's and FRBH's stronger asset quality, sustainable risk-measured returns, and sustained good capitalization and improved funding. A rating action on the sovereign would result in rating actions on FRB and FRBH.