December 5, 2017 / 5:41 PM / 2 years ago

Fitch Affirms Nedbank Group Limited and Nedbank Limited at 'BB+'; Downgrades Support Rating

(The following statement was released by the rating agency) LONDON, December 05 (Fitch) Fitch Ratings has affirmed Nedbank Group Limited's (NBG) and Nedbank Limited's (NBL) Long-Term Issuer Default Ratings (IDR) at 'BB+' with Stable Outlook. At the same time, Fitch has downgraded the Support Rating (SR) of NBG to '5' from '4', following the announcement of a clear timeframe of the separation of NBG from its majority parent Old Mutual Plc (BBB/Stable). All other ratings of NBG and NBL have been affirmed. KEY RATING DRIVERS IDRs AND VRs The IDRs of NBG and NBL are driven by the respective entity's intrinsic creditworthiness, as defined by their Viability Ratings (VRs). The VRs are constrained by the South African sovereign rating of 'BB+'. As a major domestic bank, with significant exposure to the Republic of South Africa through investments and government securities and lending to the public sector, NBL, in our view, cannot be rated above the sovereign. Given that NBL forms the major part of NBG (92% of total assets) at end-June 2017 we also view that NBG cannot be rated above the South African sovereign rating. The VRs of NBL and NBG factor in a strong company profile. NBL is the fourth- largest domestic franchise in South Africa, but has a large market share of 19%. The bank has a dominant commercial property franchise, a market in which it holds over 40% of sector lending and comprises 20% of NBG's loan book. The VRs also reflect solid financial metrics. Asset quality is sound, though concentration to property, given NBG's franchise, is high. Earnings are also in line with peers and again sound, with a return on risk weighted assets in excess of 3%. Earnings in 2016 and 1H17 have suffered from NBG's investment (21% stake) in Ecobank Transnational Incorporated (ETI: B/Stable), which was loss-making in 2016. Capitalisation is adequate, though NBG's Fitch Core Capital ratio at end-June 2017 was the lowest in the peer group at 12.7%. We also view funding as slightly weaker than the other "big four" banks. NBG has a higher cost of funding, reflective of its smaller retail franchise and is more reliant on deposits from financial corporates in South Africa, which are typically more expensive and price-sensitive. However, NBG maintains a liquidity coverage ratio well in excess of regulatory requirements at 105% at end-June 2017. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating (SR) and Support Rating Floor (SRF) of NBL have been affirmed at '3' and 'BB-', respectively, which reflects a moderate probability of support from the South African authorities if needed. We view NBL as a domestic systemically important bank, but the proposed enactment of resolution legislation in South Africa to recapitalise a failing bank makes it more likely that senior creditors would be "bailed in". Fitch continues to factor in a moderate propensity of sovereign support, as we believe that the South African authorities are likely to retain the flexibility to provide extraordinary support in the interest of financial stability. The SR of NBG has been downgraded to '5', reflecting our view that support from Old Mutual can no longer be relied on. We have assigned a Support Rating Floor of 'No Floor' to NBG, as we believe that support for the holding company is now more likely to come from the authorities as opposed to Old Mutual, but that support from the authorities can also not be relied on as we do not believe that sovereign support would extend to bank holding companies. NATIONAL RATINGS The National Ratings of NBG and NBL reflect their creditworthiness relative to the best credit and other entities in South Africa. The National Ratings of have been affirmed as their creditworthiness relative to that of the sovereign and other rated entities has not changed. SENIOR DEBT RATINGS The senior unsecured debt programme ratings of NBL are equalised with its IDRs. Therefore the ratings for these programmes have been affirmed. RATING SENSITIVITIES IDRs AND VRs The IDRs of NBG and NBL are sensitive to a change in their VRs. An upgrade of the VRs is only possible in the event of an upgrade of the sovereign rating. A downgrade of the sovereign rating would result in a corresponding downgrade of both NBG's and NBL's VRs and therefore Long-Term IDRs. In addition, the VRs are sensitive to sharp deterioration in its domestic operating environment. For NBG and NBL, they are specifically sensitive to a large property price correction, leading to increasing impairment charges on their property- backed lending book. However, this is not Fitch's base case. The VRs are also sensitive to a tightening of liquidity given higher reliance on price-sensitive depositors. SUPPORT RATING AND SUPPORT RATING FLOOR The SR and SRFs of NBL are sensitive to a change in both the authorities' ability and propensity to support the bank. The former would be indicated by a change in the sovereign rating. The latter is most likely to reflect full implementation of resolution framework in South Africa accompanied by clear statements of commitment to utilise this framework to resolve troubled banks in all scenarios. As a holding company, there is no upside for NBG's SR and SRF over the rating horizon. NATIONAL RATINGS A change in the National Ratings of NBG and NBL would result from a change in their creditworthiness relative to the other entities in South Africa. SENIOR DEBT RATINGS The senior unsecured debt programme ratings of NBL are sensitive to a change in its IDRs. The rating actions are as follows: Nedbank Group Limited Long-Term Foreign Currency IDR affirmed at 'BB+'; Outlook Stable Short-Term Foreign Currency IDR affirmed at 'B' Long-Term Local Currency IDR affirmed at 'BB+': Outlook Stable Support Rating downgraded to '5' from '4' Support Rating Floor assigned at 'No Floor' Viability Rating affirmed at 'bb+' National Long-Term Rating affirmed at 'AA(zaf)'; Outlook Stable National Short-Term Rating affirmed at 'F1+(zaf)' Nedbank Limited Long-Term Foreign Currency IDR affirmed at 'BB+'; Outlook Stable Short-Term Foreign Currency IDR affirmed at 'B' Long-Term Local Currency IDR affirmed at 'BB+': Outlook Stable Support Rating affirmed at '3' Support Rating Floor affirmed at 'BB-' Viability Rating affirmed at 'bb+' National Long-Term Rating affirmed at 'AA(zaf)'; Outlook Stable National Short-Term Rating affirmed at 'F1+(zaf)' Senior unsecured long-term rating affirmed at 'BB+' Senior unsecured short-term rating affirmed at 'B' Contact: Primary Analyst Andrew Parkinson Director +44 203 530 1420 Fitch Ratings Limited 30 North Colonnade London, E14 5GN Secondary Analyst Tim Slater Analyst +44 203 530 1791 Committee Chairperson Redmond Ramsdale Senior Director +44 203 530 1836 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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