S&P downgrades SA banks

A number of local banks took a ratings downgrade of their foreign currency debt by Standard and Poor's in their stride on Friday, with the JSE's Banks Index closing higher on the day. The move was largely expected following last month's downgrade of government debt and the fact that historically the agency hasn't rated banks higher than the sovereign.

It expects the sector to contract as a result of the economic crisis that has been aggravated by Covid-19, with credit losses likely to rise.

In its Covid-19 credit markets Insight entitled "Lower for longer on rates?", Ingham Analytics says that loan defaults because of the lockdown fallout and a decline in GDP will weigh on banks' earnings and balance sheets, reiterating its long-held caution. Being ahead of the curve is critical in markets and it says the ratings actions on banks endorses what it has been saying and modelling for some time. In this same note, it examines a strange situation locally of a bifurcated interest rate market and looks at international precedent for the phenomenon of high and rising debt and lower yields and what it could mean for South Africa. These are important considerations when plotting an investment strategy.

Also in today's newsletter, Phumelela Gaming and Leisure has entered business rescue, asking the JSE to suspend trading in its shares on Friday, and Labat Africa has taken the same route with its wholesale fuel business. Staffing group Adcorp has warned of a full-year loss but Resilient REIT says it will continue with dividend payments - although they may not be as high as previously guided.

In The Week Ahead, Chris Gilmour reviews some of last week's market-moving news and outlines what to expect in the days ahead.

Finally, "South African economic and financial fragility" asks just how fragile is the South African economy and financial system? Is the coronavirus a potential killer blow or is this an enforced opportunity to reset our common economic health and priorities?

I hope you have a good week.

Stephen Gunnion

Managing Editor, InceConnect

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