(The following statement was released by the rating agency)
Dec 10 -
-- We are assigning our 'BBB/A-2' counterparty credit ratings to South Africa-based Nedbank Ltd.
-- We are also assigning our 'zaAA/zaA-1' South Africa national scale ratings to the bank.
-- Our ratings on Nedbank reflect our 'bbb' anchor that we apply to commercial banks operating in South Africa and our view of the bank's adequate business position, adequate capital and earnings, adequate risk position, average funding, and adequate liquidity. The ratings reflect the bank's stand-alone credit profile of 'bbb'.
-- The outlook is negative, reflecting that on the Republic of South Africa.
Rating Action On Dec. 10, 2012, Standard & Poor's Ratings Services assigned its 'BBB/A-2' long- and short-term counterparty credit ratings to South Africa-based Nedbank Ltd. The outlook is negative. We also assigned our 'zaAA/zaA-1' South Africa National Scale ratings to the bank.
Rationale The ratings on Nedbank reflect its 'bbb' anchor, as well as its "adequate" business position, "adequate" capital and earnings, "adequate" risk position, "average" funding, and "adequate" liquidity, as our criteria define these terms. The ratings reflect the bank's stand-alone credit profile (SACP) of 'bbb'.
Nedbank is the fourth-largest bank operating in the highly concentrated and competitive South African banking sector, where the top-five banks account for more than 90% of total assets. In our opinion, the industry structure creates high barriers to entry, benefiting the business stability of leading banks. Nedbank is the largest operating entity within the Nedbank Group, contributing approximately 95% of loans and assets, and 90% of revenues at June 30, 2012. Nedbank has a large franchise and good market position, with good diversification from its various business lines, leading to strong business stability. The group is managed by a strong and well-established management team that is focused on improving profitability and asset quality, and on building capital.
The bank's capitalization is adequate, while its earning capacity is high. We expect Nedbank's Standard & Poor's risk-adjusted capital ratio before adjustments to reach around 7% over the next 18-24 months. In our opinion, the bank's focus on building capital, supported by a strong earnings capability, during a period of low-risk asset growth will improve internal capital generation. Nedbank intends to build capital over the next 12 months to provide an early cushion for the Basel 3 minimum capital requirements set by the South African Reserve Bank. If we came to view the difficult operating environment as a restraint on profitability, or if internal capital generation were to face significant pressure, we could change our assessment of capitalization and earnings to "moderate" in the medium term.
Nedbank's asset quality is adequate and continued to improve in the first half of 2012. We expect gradual improvement in the asset quality of the bank over the next two years, if economic growth improves and clients continue to be attracted to the affordable low-interest-rate environment. Nevertheless, Nedbank's asset quality (as for peers') remains exposed to the uncertainties of the domestic real estate market. Nonperforming loans represented 4.4% of total loans at June 30, 2012. Although higher than peers, and in the context of relatively strong real-estate-backed collateral claims, coverage by provisions was a moderate 53% on the same date.
Nedbank is exposed to the same structural funding and liquidity issues as its domestic peers. This means that the bank has short-term and concentrated funding from corporate and institutional investors. These risks are mitigated by the closed rand system, the dominance of the top tier banks in clearing and settlements, and low dependence on external funding.
Outlook The negative outlook on Nedbank reflects that on the sovereign. We would lower the ratings on Nedbank in the event of a sovereign downgrade as we do not rate any bank in South Africa above the foreign currency ratings of the sovereign. Similarly, a revision of the outlook on the sovereign to stable would trigger an outlook revision on Nedbank to stable, provided that the bank's business and financial profiles remain stable.
Given the bank's stable business profile and improving capitalization, and the potential for government support, we believe that there is limited pressure on the ratings on the bank in the medium term outside a sovereign downgrade.
Ratings Score Snapshot
Issuer Credit Rating BBB/Negative/A-2
Business Position Adequate
Capital and Earnings Adequate
Risk Position Adequate
Funding and Liquidity Average and adequate
GRE Support 0
Group Support 0
Sovereign Support 0
Additional Factors 0
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Bank Capital Methodology And Assumptions, Dec. 6, 2010
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
-- Banking Industry Country Risk Assessment Methodology And Assumptions,
Nov. 9, 2011
New Rating; CreditWatch/Outlook Action
Counterparty Credit Rating BBB/Negative/A-2
South Africa National Scale zaAA/--/zaA-1