Fitch Ratings confirmed FirstRand Bank Limited (FRB) Long Term Issuer Default Rating (IDR) at ‘BB-‘.

The outlook is stable.

Fitch has placed FRB’s Government Support Rating (GSR) of ‘b+’ on Watch Negative (RWN), reflecting the expectation that bank resolution legislation will be implemented in South Africa over the next 18 months, providing a credible framework for the bail-in of senior creditors.

A full list of rating actions is below.

Main rating factors

FRB’s IDRs are determined by its stand-alone creditworthiness, as expressed by its Viability Rating (VR) of “bb-”. The RV reflects the bank’s strong domestic business profile, strong profitability, comfortable capital cushions to absorb asset quality risk, and stable funding and liquidity. However, the VR is one step below the implied VR of “bb” due to the following constraint: operating environment/sovereign rating. This highlights the concentration of the bank’s activities in South Africa and a large sovereign exposure to equities of around 2.8x.

The bank’s domestic ratings reflect its local currency creditworthiness relative to that of other South African issuers. They are in line with all other rated banks in the country.

Global risks will weigh on growth: Fitch expects South Africa GDP growth is expected to fall to 1.9% in 2022 and 1.6% in 2023, from 4.9% in 2021, as commodity prices decline and the global economy slows. Rising inflation and electricity supply issues will also limit growth. We expect policy rates to reach 6.5% in 2022 and peak at 7% in 2023, which will support banks’ interest income. However, rising interest rates and high inflation could put moderate pressure on asset quality as household resilience weakens.

Strong national franchise: FRB is the second largest bank in South Africa by total assets with a market share of approximately 21%. It has local operations spread across three separate businesses, all with strong market positions. South Africa is the bank’s core market (87% of credit risk assets on the balance sheet end of June 2022, exercise22). FRB is 100% owned by the listed company FirstRand Limited (unrated) and its business profile is supported by sound strategic execution and strong management.

Large Household Loans: Personal loans accounted for approximately 47% of loans in FY22 and largely include variable rate residential mortgages (27% of loans), which are sensitive to rising interest rates. interest. Corporate and business loans are well diversified by sector.

Increased asset quality risk: FRB’s Fitch-adjusted impaired loan ratio (IFRS 9 stage 3 loans) improved to 4.4% in FY22 from 5.9% in FY22 21, supported by fairly high write-offs (1.6% of average loans) and higher loan growth (around 11%). Total loan loss provision coverage of impaired loans increased to 91%, above the peer average, in FY22 (FY21: 82%). However, we expect some weakening in asset quality measures in FY23 given the uncertain operating environment and household pressures.

Superior profitability: Profitability rebounded strongly to exceed pre-pandemic levels in FY22, supported by a 47% decline in loan impairment charges to 15% of pre-impairment operating income from 30% in in FY21 and 51% in FY20. FRB’s operating profit to risk-weighted assets ratio outperformed its peers, peaking at 4.5% in FY22 (FY21: 3.7%).

Adequate capitalization: FRB’s Common Equity Tier 1 (CET1) ratio (excluding unallocated earnings) decreased to 12.2% in FY22 from 12.9% in FY21, but it was still well above the regulatory requirement of 8.5% and broadly in line with its peers. We expect the CET1 ratio to remain above 12% in FY23, supported by strong internal capital generation.

Stable funding and liquidity: The bank’s Fitch-adjusted customer loan-to-deposit ratio remained stable at 86% in FY22, below pre-pandemic levels and broadly in line with its peers. FRB has low foreign funding (Fiscal Year 22: about 6% of funding) but depends on short-term institutional funding, a structural feature of South Africa big banks. This is counterbalanced by sufficient liquidity buffers. The bank’s liquidity coverage and net stable funding ratios of 124% and 120%, respectively, in FY22 were stable and well above the regulatory requirement of 100%.

Rating sensitivities

Factors that could, individually or collectively, lead to a negative rating action/downgrade:

The long-term IDR and RV of FRB are limited by South Africa sovereign rating, so that a downgrading of the sovereign rating would result in downgrades for the bank.

A deterioration in the long-term IDR and RV can also result from a significant weakening in capitalization, as indicated by a decline in the CET1 ratio below 10%, which could result from a deterioration greater than expected from asset quality or more aggressive ownership. distributions.

FRB’s domestic ratings are sensitive to changes in its creditworthiness relative to other South African issuers.

Factors that could, individually or collectively, lead to positive rating action/improvement:

A long-term FRB IDR and VR upgrade would require a sovereign upgrade while maintaining a healthy financial profile.

The bank’s domestic ratings are sensitive to changes in its creditworthiness relative to other South African issuers.

OTHER DEBT AND ISSUER RATINGS: KEY RATING FACTORS

FRB’s senior unsecured debt is rated in accordance with its IDRs (or national ratings) because the probability of default on these bonds reflects the bank’s probability of default.

The FRB’s GSR reflects a limited likelihood of support from the South African authorities, if needed, given the bank’s systemic importance.

OTHER DEBTS AND ISSUER RATINGS: RATING SENSITIVITIES

The bank’s senior unsecured debt ratings are sensitive to changes in its IDRs or domestic ratings.

Once the resolution framework is implemented, Fitch expects to downgrade the GSR to “no support”, reflecting our view that, despite their systemic importance, South African authorities’ propensity to support the banking system does not will be more certain. We do not expect RWN to be resolved within the next six months.

VR ADJUSTMENTS

The score of the “bb+” business profile is lower than the implicit score of the “bbb” category due to the following adjustment reason: business model (negative).

The asset quality score of “bb-” is higher than the implied category “b” score due to the following adjustment reason: underwriting standards and growth (positive).

Best/Worst Case Evaluation Scenario

Global credit ratings of financial institutions and covered bond issuers have a best-case scenario for a rating upgrade (defined as the 99th percentile of rating transitions, measured in the positive direction) of three notches out of a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured negatively) of four notches over three years. The full range of best-case and worst-case credit ratings for all rating categories ranges from ‘AAA‘ to ‘D’. Worst case and worst case credit ratings are based on historical performance. For more information on the methodology used to determine sector-specific best and worst-case credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR A MOSTLY MATERIAL SOURCE CITED AS A KEY SCORING FACTOR

The main sources of information used in the analysis are described in the applicable criteria.

ESG considerations

Unless otherwise specified in this section, the highest level of ESG Credit materiality is a score of “3”. This means that ESG issues are credit-neutral or have minimal impact on FRB’s credit, either due to their nature or the way they are managed by FRB.

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