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Moody’s downgrades four top South African banks

Published on 19/08/2014

Moody's downgraded the credit rating of four top South African banks Tuesday, after the government was forced to bailout a troubled lender.

The ratings agency downgraded Standard Bank, Absa, FNB and Nedbank by one notch to Baa1, in a move sure to raise more questions about the health of the vital sector.

Moody’s said the terms of African Bank’s recent rescue showed investors in other larger banks were less likely to be bailed out if they hit trouble.

There was now a “lower likelihood of systemic support from South African authorities to fully protect creditors in the event of need,” it said in a statement.

The Reserve Bank earlier this month bought up roughly $700 million (525 million euros) of bad loans from faltering African Bank, but some investors were left with losses of up to 10 percent.

The lender was crippled when too many South Africans were unable to pay back loans it had made to them without demanding collateral.

The response among investors has been muted, with many seeing African Bank’s failure as a one off.

While many South African banks had made similar “non-secured” loans, most notably Capitec, they also have other profitable lines of business that should help cover losses and have many more depositors.

But Moody’s decision will raise doubts about even the biggest banks, which are deeply enmeshed in the global financial system.

The agency also warned that further downgrades could be on the way, citing “weaker economic growth” and high inflation in South Africa, which is could pressure highly indebted consumers.

That is “likely to lead to higher credit costs for the banks,” it warned.

The financial sector accounts for as much as a quarter of South Africa’s economy and is by far the most developed on the continent, playing a key role in financing projects across Africa.