Fitch Sticks with ‘BB-‘ Ratings for Absa Group and Absa Bank – No Major Shocks Expected
Fitch Ratings, the global credit rating agency, has affirmed the Long-Term Issuer Default Ratings (IDRs) of Absa Group Limited (ABG) and its primary operating subsidiary, Absa Bank Limited (ABL), at ‘BB-‘ with a Stable Outlook. This decision comes as Fitch evaluates the financial health and outlook of these entities in the context of the current economic landscape.
The key factors influencing these ratings are as follows:
Standalone Creditworthiness: ABG and ABL’s ratings are primarily shaped by their individual creditworthiness, represented by their ‘bb-‘ Viability Ratings (VRs). These VRs are reflective of the robust regional presence of the group, a diversified and resilient business profile, strong profitability, comfortable capital buffers, and stable funding and liquidity. However, the VRs are one notch lower than the ‘bb’ implied VRs due to certain challenges. Notably, the operating environment and sovereign rating constraints, especially their significant exposure to South Africa, have played a role in this rating determination.
National Ratings: The National Ratings assigned to ABG and ABL indicate their creditworthiness concerning the local currency in relation to other South African issuers.
Moderate Double Leverage: ABG’s VR is aligned with the group’s consolidated credit profile, taking into account moderate double leverage, which stood at 110% at the close of 2022. Additionally, high capital and liquidity fungibility within the group contribute to the alignment of VRs. ABL’s VR, as the primary operating subsidiary of the group, is also aligned with the group VR.
Economic Environment: Fitch’s analysis of the South African economic outlook suggests sluggish growth, with expected real GDP growth of 0.5% in 2023, followed by a modest recovery of 0.9% in 2024. The economy faces challenges including energy crises, deteriorating net exports, and slowing domestic demand. While banks stand to benefit from policy rate increases, they also contend with elevated risk costs due to the weakened resilience of borrowers.
Strong Franchise and Sound Execution: ABG’s strength in the domestic market, particularly through ABL, along with its regional operations in southern and eastern Africa, provide earnings diversification. The bank has demonstrated successful execution of its post-Barclays strategy, as evidenced by strong performance.
Asset Quality Risks: ABG has experienced an uptick in its Fitch-adjusted impaired loans ratio, which reached 6.7% at the close of 1H23, with total reserves coverage at 65%. This indicates some challenges in asset quality, particularly in the household segment, due to pressures in the operating environment.
Profitability: ABG has maintained solid profitability, boasting an annualized operating profit/risk-weighted assets (RWAs) ratio of 3.2% in 1H23. This achievement has been driven by margin expansion, non-interest revenue, and prudent cost control. However, higher loan impairment charges are expected to exert pressure on profitability in 2023-2024.
Capitalization: ABG’s common equity Tier 1 (CET1) ratio increased to 12.3% at the close of 1H23, exceeding regulatory requirements but lagging behind some peers. The bank aims to manage this ratio within the range of 11%-12.5% in 2023-2024.
Funding and Liquidity: ABG maintains stable funding and liquidity positions, evident in a loans/customer deposits ratio of 96% at the end of 1H23, a liquidity coverage ratio of 141%, and a net stable funding ratio of 118% at the same date. These ratios are well above regulatory minimums, indicating a strong liquidity position.
Government Support Rating: Fitch has downgraded ABL’s Government Support Rating (GSR) to ‘ns’ (no support) from ‘b+’ in light of recent resolution legislation in South Africa. This legislation introduces a credible framework for the bail-in of senior creditors in the event of bank failures, making government bail-outs of banks highly unlikely. This underscores Fitch’s view that potential government support is no longer anticipated.
The ratings for ABG and ABL are primarily influenced by their strong standalone creditworthiness, although they face challenges in the operating environment, especially concerning asset quality and profitability. The recent downgrade in the Government Support Rating reflects the evolving regulatory landscape in South Africa regarding bank bail-outs.
