Sunday 18, June 2017 by Matthew Amlôt

Moody's raises the national scale ratings of two South African banks

Moody's Investors Service has today raised Mercantile Bank Limited's (Mercantile) long- and short-term national scale ratings (NSRs) to Baa1.za/P-2.za from Baa3.za/P-3.za respectively and Bidvest Bank Limited's (Bidvest) long-term NSR to Aa2.za from A1.za. At the same time, Moody's affirmed Bidvest's global scale ratings (GSRs) and changed the outlook to negative from stable.

The rating action on the two banks' national scale ratings follows Moody's decision to downgrade South Africa's government bond rating to Baa3 from Baa2, and the subsequent recalibration of South Africa's NSR maps. For further information, refer to the sovereign press release. According to Moody's Cross sector rating methodology "Mapping National Scale Ratings from Global Scale Ratings", dated May 2016, NSR maps are revised in conjunction with changes in the sovereign rating. In the case of South Africa, such a scenario has led to Mercantile and Bidvest's global scale ratings mapping to higher NSRs.

Today's rating action follows the recent downgrade of South Africa's government bond rating to Baa3 (negative) from Baa2 (Rating under review), and the subsequent revision of South Africa's NSR mappings.

Moody's NSRs are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. Although Moody's views the fundamental creditworthiness of Bidvest and Mercantile as unchanged, the revision of the NSR mapping driven by the sovereign downgrade, has triggered a repositioning up of their NSRs.

NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Cross-sector rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings".

-- BIDVEST BANK LIMITED: GSR AFFIRMATION AND CHANGE OF OUTLOOK TO NEGATIVE

Moody's has affirmed the Ba1/Not Prime long- and short-term local currency issuer ratings assigned to Bidvest. The affirmation reflects the bank's solid financial fundamentals and, specifically, its comfortable capitalization level (reported Tier one ratio of 22.1 per cent as of December 2016) and robust profitability (reported return on assets of 5.1 per cent for the six months ending December 2016) as well as our assumptions of a very high probability of parental support from Bidvest Group Limited (LT Issuer rating, Baa3 negative outlook) in case of need.

The outlook on the global scale long-term issuer ratings was changed to negative from stable, primarily driven by the negative outlook on the Baa3 issuer ratings Bidvest Group Limited which fully owns Bidvest. A potential further weakening of the Bidvest Group's creditworthiness will signal additional pressure on the parent's capacity to provide support, inevitably impacting Bidvest Bank's ratings as well. Specifically, in the event of a further downgrade of Bidvest Group Limited's issuer rating, the negative outlook captures the possibility of reducing the two notches of uplift currently incorporated in Bidvest's GSR.

WHAT COULD MOVE THE RATINGS UP/DOWN

Any upwards rating momentum of the banks' global scale ratings is currently limited as a result of the challenging operating conditions.

The banks' ratings could be downgraded if their financial performance weakens, leading to significantly higher loan loss provisions that prompt deteriorations in the banks' earnings and capital metrics.

In the case of Bidvest Bank, its ratings could also be downgraded if the capacity of Bidvest Group to provide support is impaired.

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