S&P boosts ratings for big banks and insurers

Ratings agency Standard & Poor’s (S&P) has upgraded the credit ratings of South Africa’s leading banks and insurance companies, reflecting the improved creditworthiness of the financial services sector credit profile after the sovereign upgrade on Friday.

The agency upgraded the ratings of FirstRand, Absa, Capitec, Investec and Nedbank to be in line with that of the sovereign.

S&P does not rate banks above the foreign currency sovereign ratings, given the direct and indirect impact that sovereign distress would have on domestic banks’ operations.

The agency said it expects household lending in South Africa will increase at a measured pace, supported by the reduction in interest rates, with the agency expecting the decision by National Treasury to lower the inflation target to 3% to keep inflation close to the new target in 2025-28.

Read: Economists welcome S&P upgrade, but caution against complacency

“We expect healthy financial performance by South African banks. We anticipate an adequate return on equity of 16% on average in 2026, supported by banks’ diversified business models, stable share of noninterest income, lower provisions and higher credit growth,” S&P said.

“South African banks are not exposed to large-scale refinancing risk thanks to their limited exposure to international funding. This positively differentiates South African banks from other emerging market banks.”

The ratings agency also upgraded the ratings of Sanlam, Old Mutual, Santam and Liberty.

Read: STUART THEOBALD: S&P upgrade sparks hope for SA’s investment grade return

S&P rates Old Mutual and Sanlam one notch above the foreign currency rating on the sovereign, saying this reflects its belief that the insurers’ largely loss-absorbing liability profile would allow them to withstand the stress associated with a foreign currency sovereign default.

“South Africa’s insurance sector has maintained resilient and sound capital buffers in a challenging economic environment. This has been supported by risk management practices under the local risk-based solvency regime to manage and mitigate both underwriting and financial market shocks,” S&P said.

“We recognise that insurers remain subject to the long-term economic growth prospects for South Africa, given their concentration in the country. We believe the long-term premium and earnings growth in South Africa remain constrained, considering an improving but still challenging economic environment.”