April 6, 2017 / 4:36 PM / 6 months ago

UPDATE 1-South Africa's bank shares lead stocks down, rand recovers

* Banking index down 1.78 pct

* Rand recovers, risks remain high

* Bonds under pressure (Adds closing levels, analyst comment)

JOHANNESBURG, April 6 (Reuters) - South Africa’s banking index hit its biggest daily loss since December 2015 on Thursday, dragging the bourse down after S&P cut the credit ratings of major lenders following a sovereign downgrade.

The rand firmed slightly, after tumbling more than 11 percent since March 27 when President Jacob Zuma ordered then finance minister Pravin Gordhan to return home from overseas meetings with investors, days before dismissing him in a cabinet reshuffle that triggered the downgrade.

The banking index fell 1.78 percent, its biggest daily loss since Dec 2015 when President Jacob Zuma changed finance ministers twice in a week.

“What usually happens is that hedge funds have mandates when things get downgraded to junk ... to de-leverage or sell out because they are not allowed to hold risky debt on their books,” BP Bernstein trader Vasili Tirasis said.

The broader All-Share index fell 0.14 percent to 52,918 points, while the benchmark Top-40 index inched up 0.04 percent to 46,170 points.

Capitec Bank fell 4.85 percent to 720 rand, while FirstRand dropped 0.82 percent at 44.90 rand, Standard Bank weakened 1.64 percent to 136.47 rand and Nedbank declined 1.35 percent to 225.80 rand.

On the foreign exchange market, at 1500 GMT, the rand traded at 13.7675 per dollar, 0.31 percent stronger from its New York close on Wednesday.

“Let’s be clear, rand risks remain high and further losses cannot be ruled out. But there are at least some signs of stability,” said Rand Merchant Bank currency strategist John Cairns.

In fixed income, the yield for the benchmark government bond due in 2026 rose 1.5 basis points to 9.020 percent.

Local bonds might continue to struggle as political turmoil in the country and uncertainty around Fitch’s possible “junk” rating lures money managers away.

“The bond market trading at more than 9 percent, that is a very penalising yield to be paying, obviously because of the recent political developments,” said Efficient Group chief economist Dawie Roodt.

Downgrades to junk from at least two agencies would see South Africa drop out of some widely used global bond indexes and force international funds which track them or which are prohibited from holding sub-investment grade securities to sell. (Reporting by Olwethu Boso; Editing by James Macharia)

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