Banks lose R61bn on Gordhan ouster, S&P downgrade

Johannesburg - South Africa’s banks have since the ousting of Pravin Gordhan and his deputy Mcebisi Jonas lost R61bn so far.

The fallout was however muted compared to the market rout suffered when finance minister Nhlanhla Nene was fire in December 2015. That wiped more than R155bn off the index’s market value in two days

On Tuesday the JSE Banks Index fell to the lowest in six months after S&P Global Ratings cut the sovereign’s foreign-currency debt rating to junk, increasing the likelihood that lenders will have to battle declining returns and rising bad debts in the year ahead.

The six-member banks index, which includes Standard Bank [JSE:SBK] and Barclays Africa [JSE:BGA], has plummeted more than 9% since President Jacob Zuma fired Finance Minister Pravin Gordhan, making it the country’s worst-performing stocks gauge this year.

Barclays Africa, still waiting for its London-based parent company to sell down its holdings, has been hit the hardest, sliding 18% in 2017. The rand has also weakened against major currencies while yields on benchmark government bonds have soared.

The S&P downgrade “is bad for banks’ net return on assets and return on equity, not just via lower performance on existing assets, but also via a higher incidence of non-performing loans,” Adrian Saville, chief strategist at Citadel Wealth Management, said in emailed comments on Tuesday. 

“The real issue is the impact on economic growth, industrial performance and employment. There is an unambiguous negative relationship between economic growth and bank assets.”

S&P cut South Africa’s foreign-currency debt to junk status on Monday night, just two trading days after Zuma axed Gordhan and replaced him with former home affairs minister Malusi Gigaba, a rookie when it comes to finance and business.

While the nation had an investment grade rating for 17 years, S&P said its downgrade was in response to Zuma’s cabinet purge. Moody’s Investors Service said on Monday its ratings were on review.

South Africa cut to junk first time since 2000 after Zuma purge

Short-term volatility in bank stocks is expected, Mike Brown, chief executive officer of Nedbank [JSE:NED], said by email. “Our cost of capital and certain borrowing costs, mainly in debt-capital markets, will increase, meaning we will charge more for our loans. As consumer finances come under more pressure, affordability will naturally decline, even if lending criteria stays the same.”

“Banking shares get priced, or valued, relative to the 10-year government bond yield,” said Adrian Cloete, a banks analyst at PSG Wealth in Cape Town. “A weaker rand also causes investors to switch out of local South African shares like banks, retailers and local property counters.”

Before Gordhan was fired and S&P changed its rating, South Africa’s biggest banks were considering easing lending criteria for the first time in five years because the economic outlook was better than last year and bad-loan charges were at a multi-year low. 

Still, even with the downgrade and the threat of more to come, banks’ average return on equity remained above 16% last year, according to Ernst & Young research, and may continue to beat the ratios of their peers in Europe and the US.

“We have 50% more capital than in the global financial crisis and all South African banks came through that event fine,” Nedbank’s Brown said. “Banks are well prepared for this event and have conducted numerous stress tests - I’m confident all will remain stable in the months ahead.”

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