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South African Banks Prepare for Worst as Junk Rating Looms

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  • South African Banks Prepare for Worst as Junk Rating Looms

South African banks are preparing for the worst when it comes to the threat of another downgrade of the country’s debt.

“FirstRand anticipated the downgrades since 2015 and has been working on a number of proactive strategies to mitigate the impact,” said Andries du Toit, the treasurer at Johannesburg-based FirstRand Ltd., the country’s second-biggest bank by assets. The measures included tightening lending and boosting liquidity and capital buffers, he said.

The credit ratings of the continent’s largest lenders such as Standard Bank Group Ltd., Barclays Africa Group Ltd., Nedbank Group Ltd. and FirstRand are inextricably tied to that of South Africa, where they make most of their profit. Banks also need to hold sovereign bonds for regulatory purposes, meaning that any increase in the government’s borrowing costs immediately causes the capital the companies need to support lending to become more expensive.

In a move that may help establish a sizable offshore base, FirstRand last month offered to buy all of the U.K.’s Aldermore Group Plc for about 1.1 billion pounds ($1.4 billion). Although the purchase of the challenger to some of Britain’s biggest lenders won’t save FirstRand from higher costs in South Africa, it’s a step to creating a platform to source offshore funding and to earn income in a currency other than rand.

FirstRand increased its total Tier 1 capital levels to 17.1 percent as of the end of June compared with 16.9 percent a year earlier.

Pending Reviews

At stake for the nation’s lenders is the credit assessment on the country’s local-currency bonds, which account for 90 percent of the government’s issued debt. S&P Global Ratings and Moody’s Investors Service, which are both due to announce their latest reviews on Nov. 24, still rate rand-denominated debt as investment grade.

A change in either one of those evaluations could see South Africa removed from some indexes tracked by global investors, triggering outflows and pushing up borrowing costs. While the ratings companies could wait until after the ruling African National Congress’s conference next month to decide on who will replace President Jacob Zuma, the agencies may be swayed to act sooner after National Treasury on Oct. 25 said that the budget deficit will widen and debt levels will climb.

The country’s foreign-currency debt was downgraded to junk by S&P and Fitch Ratings Ltd. after former Finance Minister Pravin Gordhan was fired by President Jacob Zuma at the end of March.

“Banks are cyclical investments so will be impacted by any downturn as a result of a sovereign downgrade and the resultant impact on the economy and our clients,” said Mike Davis, Nedbank Group Ltd.’s executive for balance-sheet management. “We have, however, been aware of this risk for a long while and are well prepared for such an event should it happen.”

‘Front-Loaded’

The lender has no plans to raise additional funding in the market this year, having “front-loaded” earlier in 2017 in anticipation of a credit downgrade, said Davis. Only about 8 percent of its funding is raised in bond markets, with the bulk of it provided by deposits. Barclays Africa didn’t respond to emailed requests for comment.

Even with operations across 19 other countries on the continent, Standard Bank still would not be able to achieve credit ratings above that of its home market, which accounts for about 70 percent of its revenue, according to data compiled by Bloomberg.

The rating of a bank “is linked by credit-rating agencies to sovereign exposures it holds,” said Arno Daehnke, the finance director of Johannesburg-based Standard Bank, Africa’s largest lender. “It is difficult to pierce the sovereign ceiling, even after the consideration of foreign-asset holdings.”

The pressure on the banks has been evident in their slowing profit growth and lackluster share prices. The six-member FTSE/JSE Africa Banks Index has climbed 0.9 percent this year, compared with the all-share gauge’s 18 percent rally to a record high.

“The bank undertakes scenario planning on an ongoing basis, including the possibility of a downgrade of the sovereign local-currency rating to sub-investment grade,” Standard Bank’s Daehnke said. “The bank accesses a diverse source of retail and wholesale funding markets, and the mix is not expected to change materially in the next two to six months.”

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

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Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

Oil retreated from an earlier rally with investment banks and traders predicting the market can go significantly higher in the months to come.

Futures in New York pared much of an earlier increase to $63 a barrel as the dollar climbed and equities slipped. Bank of America said prices could reach $70 at some point this year, while Socar Trading SA sees global benchmark Brent hitting $80 a barrel before the end of the year as the glut of inventories built up during the Covid-19 pandemic is drained by the summer.

The loss of oil output after the big freeze in the U.S. should help the market firm as much of the world emerges from lockdowns, according to Trafigura Group. Inventory data due later Tuesday from the American Petroleum Institute and more from the Energy Department on Wednesday will shed more light on how the Texas freeze disrupted U.S. oil supply last week.

Oil has surged this year after Saudi Arabia pledged to unilaterally cut 1 million barrels a day in February and March, with Goldman Sachs Group Inc. predicting the rally will accelerate as demand outpaces global supply. Russia and Riyadh, however, will next week once again head into an OPEC+ meeting with differing opinions about adding more crude to the market.

“The freeze in the U.S. has proved supportive as production was cut,” said Hans van Cleef, senior energy economist at ABN Amro. “We still expect that Russia will push for a significant rise in production,” which could soon weigh on prices, he said.

PRICES

  • West Texas Intermediate for April fell 27 cents to $61.43 a barrel at 9:20 a.m. New York time
  • Brent for April settlement fell 8 cents to $65.16

Brent’s prompt timespread firmed in a bullish backwardation structure to the widest in more than a year. The gap rose above $1 a barrel on Tuesday before easing to 87 cents. That compares with 25 cents at the start of the month.

JPMorgan Chase & Co. and oil trader Vitol Group shot down talk of a new oil supercycle, though they said a lack of supply response will keep prices for crude prices firm in the short term.

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Crude Oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

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Crude oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

Oil prices rose on Monday as the slow return of U.S. crude output cut by frigid conditions served as a reminder of the tight supply situation, just as demand recovers from the depths of the COVID-19 pandemic.

Brent crude was up $1.38, or 2.2%, at $64.29 per barrel. West Texas Intermediate gained $1.38, or 2.33%, to trade at $60.62 per barrel.

Abnormally cold weather in Texas and the Plains states forced the shutdown of up to 4 million barrels per day (bpd) of crude production along with 21 billion cubic feet of natural gas output, analysts estimated.

Shale oil producers in the region could take at least two weeks to restart the more than 2 million barrels per day (bpd) of crude output affected, sources said, as frozen pipes and power supply interruptions slow their recovery.

“With three-quarters of fracking crews standing down, the likelihood of a fast resumption is low,” ANZ Research said in a note.

For the first time since November, U.S. drilling companies cut the number of oil rigs operating due to the cold and snow enveloping Texas, New Mexico and other energy-producing centres.

OPEC+ oil producers are set to meet on March 4, with sources saying the group is likely to ease curbs on supply after April given a recovery in prices, although any increase in output will likely be modest given lingering uncertainty over the pandemic.

“Saudi Arabia is eager to pursue yet higher prices in order to cover its social break-even expenses at around $80 a barrel while Russia is strongly focused on unwinding current cuts and getting back to normal production,” said SEB chief commodity analyst Bjarne Schieldrop.

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Crude Oil

Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

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Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

Oil prices rose to $65.47 per barrel on Thursday as crude oil production dropped in the US due to frigid Texas weather.

The unusual weather has left millions in the dark and forced oil producers to shut down production. According to reports, at least the winter blast has claimed 24 lives.

Brent crude oil gained $2 to $65.47 on Thursday morning before pulling back to $64.62 per barrel around 11:00 am Nigerian time.

U.S. West Texas Intermediate (WTI) crude rose 2.3 percent to settle at $61.74 per barrel.

“This has just sent us to the next level,” said Bob Yawger, director of energy futures at Mizuho in New York. “Crude oil WTI will probably max out somewhere pretty close to $65.65, refinery utilization rate will probably slide to somewhere around 76%,” Yawger said.

However, the report that Saudi Arabia plans to increase production in the coming months weighed on crude oil as it can be seen in the chart below.

Prince Abdulaziz bin Salman, Saudi Arabian Energy Minister, warned that it was too early to declare victory against the COVID-19 virus and that oil producers must remain “extremely cautious”.

“We are in a much better place than we were a year ago, but I must warn, once again, against complacency. The uncertainty is very high, and we have to be extremely cautious,” he told an energy industry event.

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