JOHANNESBURG, April 6 (Reuters) - South Africa's banking sector fell by nearly three percent on Thursday after S&P cut the credit ratings of several major financial institutions following a sovereign downgrade.
S&P cut South Africa's credit level to junk status on Monday, citing growing concerns of political and policy instability following President Jacob Zuma's midnight cabinet reshuffle a week ago.
A weak rand following the downgrade compounded the impact on banking shares on Thursday, with Capitec Bank 4.83 percent lower at 720.18 rand, FirstRand down 2.92 percent at 43.95 rand, Standard Bank falling 2.81 percent to 134.85 rand and Nedbank dropping 2.82 percent to 222.42 rand at 1020 GMT.
S&P Global Ratings said on Wednesday it had cut to 'BB+/B' from 'BBB-/A-3', its long- and short-term counterparty credit ratings on FirstRand Bank Ltd., Nedbank Ltd., and Investec Bank Ltd. It also lowered its long-term counterparty credit rating on FirstRand Ltd. to 'BB-' from 'BB+'.
It also lowered its long- and short-term national scale ratings on Barclays Africa Group Ltd and FirstRand Ltd to 'zaBB+/zaB' from 'zaA/zaA-2' and its long-term national scale ratings on Barclays Africa Group's subsidiary, Absa Bank Ltd, to 'zaA' from 'zaAA-'.
"We lowered our ratings on the financial institutions because we do not rate South African banks above the foreign currency sovereign credit ratings. This is because of the likely direct and indirect influence of sovereign distress on domestic banks' operations, including their ability to service foreign currency obligations," S&P said in a statement.
The ratings group said that despite "slow economic growth and political turbulence, South African banks have been performing resiliently".
But it warned that if the rand falls further and sparks rises in inflation and interest rates then this could increase credit losses among the country's top banks and damage their profitability and their return on equity this year.
Although the rand was 0.45 percent firmer at 13.7475 rand to the dollar, it was still near to Tuesday's almost three month low of 13.9400 rand to the dollar.
"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.
Barclays Africa and Nedbank both said they were well placed to withstand the downgrade.
"Barclays Africa is well-capitalised with a strong liquidity position and a balance sheet of over 1 trillion rand," the regional unit of Britain's Barclays Plc said.
"We must remember that Nedbank is operating in a South African banking system that is sound and well-capitalised," Nedbank's Chief Executive Mike Brown said in a statement. (Reporting by Tanisha Heiberg; editing by Alexander Smith)