Fitch Affirms Nedbank Group, Downgrades Nedbank Ltd, Outlook Stable
Fitch Ratings-Johannesburg/London-24 July 2009: Fitch Ratings has today downgraded Nedbank Limited's (Nedbank) Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BBB' from 'BBB+', respectively. At the same time, the agency has downgraded Nedbank's National Long-term rating to 'AA-(zaf)' from 'AA(zaf)'. The Outlooks on the three ratings have been revised to Stable from Negative. Fitch has simultaneously aligned the ratings of Nedbank Group Limited (Nedbank Group) with Nedbank by affirming its Long-term foreign and local currency IDRs, National Long-term rating and revised the Outlooks to Stable from Negative. Nedbank Group's Short-term foreign currency IDR has also been upgraded to 'F2' from 'F3'. A full rating breakdown is provided below.
The downgrade of Nedbank's ratings reflects the impact of a deteriorating macroeconomic environment in South Africa which has resulted in declining asset quality trends and as a result weakening profitability indicators. Notwithstanding, Nedbank's ratings continue to reflect the benefits from a well-established and growing domestic franchise as one of the four largest banks in South Africa. The strong franchise should underpin its revenue generating ability through this tough economic cycle.
Nedbank Group's 20 July 2009 trading update indicated that its diluted headline earnings per share for the period to H109 are expected to be between 32% and 37% lower than H108. Given the difficult operating environment and worsening credit conditions in South Africa, the agency considers that Nedbank Group's full year earnings to FY09 may be significantly lower than FY08. Although the recent trend of declining interest rates should cause retail impairment growth to slow, the agency considers that these improvements could be offset by higher impairments from within the bank's large corporate and small business loan portfolios. In addition, high loan-to- value (LTV) ratios on the bank's relatively unseasoned home loan book could negatively impact impairment charges in a softening property market.
At end-2008, Nedbank Group's non-performing loan (NPL) ratio deteriorated to 4.0% from 2.7% at end-2007, as a result of higher defaults from the bank's retail loan portfolio. Fitch notes that, excluding the impact of write-offs, NPLs increased 167% year-on-year. The agency considers Nedbank's coverage ratio of 45.4% at end-2008 (end-2007: 61.3%) to be low.
Liquidity risk within Nedbank is mitigated by a stable deposit base, reflecting its well established domestic franchise and surplus liquidity buffers. At Q109, Nedbank Group reported a Tier 1 capital adequacy ratio of 10%, up from 8.2% at end-2007 on a pro-forma Basel II basis. Fitch recognises the steps taken to improve overall Tier 1 capital, however, the agency considers that these initiatives will need to be continued given the difficult operating environment and further pressure on earnings.
In aligning Nedbank's ratings with the Nedbank Group's ratings, Fitch has also reviewed the level of integration between the holding company and its bank subsidiary and believes there is very little difference in the credit quality of the two entities. The agency considers the overall levels of integration between the two entities to be high, with insignificant external obligations within the holding company and inter-group obligations interest free and without repayment dates.
The rating actions are as follows:
Nedbank Group
Long-term foreign currency IDR: affirmed at 'BBB'; Outlook revised to Stable from Negative
Long-term local currency IDR: affirmed at 'BBB'; Outlook revised to Stable from Negative
Short-term foreign currency IDR: upgraded to 'F2' from 'F3'
National Long-term Rating: affirmed at 'AA-(zaf)'; Outlook revised to Stable from Negative
National Short-term Rating: affirmed at 'F1+(zaf)'
Individual Rating: affirmed at 'C'
Support Rating: affirmed at '2'
Nedbank
Long-term foreign currency IDR: downgraded to 'BBB' from 'BBB+'; Outlook revised to Stable from Negative
Long-term local currency IDR: downgraded to 'BBB' from 'BBB+'; Outlook revised to Stable from Negative
Short-term foreign currency IDR: affirmed at 'F2'
National Long-term Rating: downgraded to 'AA-(zaf)' from 'AA(zaf)'; Outlook revised to Stable from Negative
National Short-term Rating: affirmed at 'F1+(zaf)'
Individual Rating: affirmed at 'C'
Support Rating: affirmed at '2'
Nedbank Group is South Africa's fourth-largest banking group. Nedbank is the group's primary operating subsidiary and comprises four core business clusters - Nedbank Corporate, Nedbank Business Banking, Nedbank Retail and Nedbank Capital - as well as its 50.1% subsidiary, Imperial Bank Limited. The group is 53.98 %-owned by Old Mutual Life Assurance Company (SA) Limited and its associates. The ultimate holding company is Old Mutual Plc.
Contacts: Anthony Walker, Denzil de Bie, Johannesburg, Tel: +27 11 380 0900.
Media Relations: Hannah Warrington, London, Tel: +44 (0) 207 417 6298, Email: hannah.warrington@fitchratings.com.
Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(zaf)' for National ratings in South Africa. Specific letter grades are not therefore internationally comparable.
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