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The Land Bank has become the first big state-owned company in SA to be relegated to junk status by Moody’s rating agency. The New York-based agency, which is the last remaining among the big three to rate SA as investment grade economy, said given government’s fiscal challenges, it expected less financial support for the Land Bank from the state.
The agency downgraded Land Bank’s long-term issuer ratings to Ba1 from Baa3. This is a notch below investment grade. It's also a notch below SA’s sovereign rating, which the agency affirmed at Baa3 with a negative outlook in November, and also below Transnet and Eskom, who continue to enjoy a Baa3 rating from Moody's, despite the latter’s debt and solvency woes. Land Bank’s short-term issuer ratings were downgraded to “Not Prime” from P-3.
“The ratings downgrade reflects Moody's assessment that ongoing fiscal challenges suggest that the South African government will be more selective in dispersing financial support to state-owned enterprises, including to Land Bank,” said Moody’s in a statement. The agency also revised Land Bank’s outlook to negative for the same reason. The agency said it assumes a high likelihood of government support for Land Bank, given that it’s a state-owned bank.
Moody’s flagged the pending downgrade of the Bank in November, saying that its assets quality, rise in non-performing loans and its capital adequacy levels presented a cocktail of challenges, making its profile riskier than the general global banking sector.
Land Bank recorded a 3.6% increase in its non-performing loans – loans that are in default or where clients have not made payments in time and are at risk of defaulting – to 17.9% in the 2019 financial year. But Moody’s was more concerned about the increase in stage 3 or impaired loans, which grew to 8.8% from 6.7% in 2018. The Bank said slow economic growth and droughts contributed to some farmers struggling to repay the Bank while its R662m exposure to Tongaat Hulett exacerbated losses.
On Tuesday, Moody’s said the increased credit risks elevated Land Bank’s solvency pressures. In the 2019 financial year, the Bank reported a capital adequacy ratio of 16.4%, slightly above the 15% mandated by bank’s solvency laws and Moody’s remarked that this only provided “a modest” cushion. Moody’s also flagged corporate governance concerns as a factor that worked against Land Bank.
“While the rating agency acknowledges initiatives taken by Land Bank to strengthen governance in light of generally heightened attention to South African state-owned enterprises, the prolonged period of uncertainty in relation to appointing a permanent CEO who will ensure sustained oversight of the bank's operations and strategic direction is a cause for concern. For Land Bank, corporate governance remains a key credit consideration,” said Moody’s in a statement.
The Bank has not been with a permanent CEO since December 2018, when Tshokolo Nchocho moved to the IDC, and Konehali Gugushe, who had been acting since May 2019 resigned earlier this month.
