S&P regards itself as the most conservative of the world's three major credit ratings agencies. So the news that it will not be adjusting the ratings of any SA bank is heartening in a banking system rocked by the collapse of microlending pioneer Abil. In our interview on CNBC Africa's Power Lunch today, S&P's primary credit analyst Matthew Pirnie explains what it would take for S&P to change its mind and follow in Moody's much criticised recent footsteps. – AH .ALEC HOGG: Joining us now to discuss that Standard & Poors decision not to downgrade South Africa's Big Four banks and its support for the way the Reserve Bank managed the collapse of African Bank, is Matthew Pirnie. He's a Primary Credit Analyst at Standard & Poor's. Matthew, we did talk a little off-air. Just to clarify something that Joel Stern said on this program yesterday the flag-waver in the US downgrade was not Moody's but in fact; it was you guys – S&P..MATTHEW PIRNIE: Yes, we were the first to move on the US sovereign rating because of its indebted position. I'm not a sovereign analyst, but we do tend to be the more conservative rating agency. .ALEC HOGG: How do you judge that, when you say you're more conservative? Are your ratings generally lower than Moody's or Fitch?.MATTHEW PIRNIE: I believe it depends upon asset class, but in my asset class – financial services – and within Africa, yes, we are generally one to two notches lower than Moody's..ALEC HOGG: So on Friday night, certainly Capitec were somewhat surprised at seeing what Moody's did. Were you?.MATTHEW PIRNIE: Well, the way they went about it is, I guess, what surprised them. We don't capture any sovereign support into the bank ratings here, so from that point of view, we wouldn't have done that. Arguably, the timing on the Capitec issue, because of Abil… it's understandable that perhaps it should have been caught beforehand, but then it's hard to talk about a competitive ratings agency because I'm not really sure what their processes and criteria are. It would have been slightly different under our processes..ALEC HOGG: Do any of the banks pay you to rate them?.MATTHEW PIRNIE: Yes, we are paid by FirstRand, Investec, and Nedbank, and we have a rating on Standard Bank, too..ALEC HOGG: But you aren't paid by Capitec – do you have a rating on them? Were you paid by Abil for rating them?.MATTHEW PIRNIE: No..ALEC HOGG: So we can't blame you for not picking up on Abil because you didn't rate them?.MATTHEW PIRNIE: That would be appreciated – yes..GUGULETHU MFUPHI: Walk us through that relationship, because it almost seems as though it's needed for a bank to have some kind of rating in order for them to get capital from the market..MATTHEW PIRNIE: That's right. The process is that we rate by request, so the bank or the issuer has to come to a ratings agency and ask. It's usually set up by ratings advisers/investment bankers. They come and ask for the request, and then we rate. I have to say, I know very little about the commercial side of the business because there are firewalls between the two, for obvious reasons, but that's the process. I'm told by my Managing Director, 'Matt, you have to go and do this' and I go and do that..ALEC HOGG: The key thing here is that you have decided not to downgrade the ratings on the South African Big Four banks. Why?.MATTHEW PIRNIE: As I said before, fundamentally, we've never – or we haven't in recent history – placed any government support into the bank ratings because of the relativity between bank ratings and that of the sovereign, ie we believe the banks in this country are very solid in comparison to the sovereign conditions or the economy that they operate in. .ALEC HOGG: Just explain that really basically because earlier, George Herman said you rate the banks higher than the sovereign. In other words, Standard Bank has a better rating than South Africa does?.MATTHEW PIRNIE: No. On that point, we fundamentally capture bank ratings at the sovereign. We don't believe that a bank should be rated better than the sovereign it operates in and that's fundamentally because… Imagine all the T-bills it carries. Imagine all the bonds it carries. Imagine the regulatory imposition that could happen if there was a default in the sovereign, so for us it just makes sense not to do that. From the other point of view though, we believe the South African banking industry is world-class, whereas the economy it is operating in has a dualistic nature, of which we're obviously all aware. The fundamentals between the two means that we believe the banks have very good creditworthiness in comparison to the sovereign, which is obviously a reflection of the economy and the taxpayers..ALEC HOGG: But you're focusing on the banks, and as far as the banks are concerned, that's the key thing here. You don't know Capitec. You haven't done a rating on them. If I were Capitec's CEO, I'd be firing Moody's. Would you guys then go in – and if so how long would it take you to do a rating?.MATTHEW PIRNIE: It takes us about eight weeks – maybe six to eight weeks..ALEC HOGG: I'm asking that because clearly, Capitec now has to try to do something if they've had a two-notch downgrade. .MATTHEW PIRNIE: I know it's quite hard to speak about it. I'd genuinely have no idea until someone tells me 'you're doing this'.ALEC HOGG: The question though, is if you're a company or a bank (in this particular instance), it seems a high risk to have just one ratings agency..MATTHEW PIRNIE: In Europe, it's a lot more common to have two. Actually, I think that's somewhat reflective of the development of the fixed income market here, which is less developed than the equity markets here. So as maturity happens within the market you tend to get two ratings agencies. I think that will happen. Abil…Capitec… Those reasons might prompt people to start having two ratings agencies..ALEC HOGG: What would it take for you to downgrade the South African banks (like Moody's has done)?.MATTHEW PIRNIE: It could be a number of things, but the most likely is a significant economic shock. I would say that's probably the major concern. What we're looking at now, from a trending point of view, is the consumer: how stressed the consumer is and how exposed they are to interest rates. I think that's going to be the big one. If there's a significant interest rate shock in SA, say 300 basis points, then all of a sudden the non-performing loans at the banks would start ticking up. We would then have to go and see the banks. We don't just do gut reactions. We go and see the banks, see how they're provisioning, and see how they're prepared for that downturn. That's probably the biggest single risk facing the sub-sector..GUGULETHU MFUPHI: You haven't said anything about global conditions. We recently saw China – the exposure of Standard Bank causing quite a significant impairment there..MATTHEW PIRNIE: Yes. Global conditions – maybe – but South African banks on the whole…their creditworthiness is defined by what happens in South Africa. If something significant happens from abroad then we would. But stuff like the Standard Bank deal, which is obviously a big issue from them – it hits earnings – but really, from a creditworthiness point of view, we don't see it as a factor. .ALEC HOGG: Matthew, how much time did you spend on actually reading what actions the Reserve Bank took in Abil? It does appear that they've broken new ground..MATTHEW PIRNIE: Quite a bit, actually, and we have a very good relationship with the regulators. . I have to say that the regulators here are world-class and they're very transparent to us. .We have a great relationship. They opened up all their senior management for us to speak to about each one of the issues we had, so yes, we went into it in great detail. You're absolutely right: they've created a precedent, basically, in the way they've done resolution. However, let me give you some mitigation to that. The resolution of Abil will look very different to the resolution of every single other bank or every single large bank in this sector. You can read in precedents. You can read in precedents to the bail-in and the subordinated debt, the haircut of senior debt, and the market-led solution. That's the type of precedents set. However, if you're going to bail in a big Bank – I don't want to say one, because it could be any bank – they're much larger and much more complex. .They have short-term funding. If you think of the complexity of dealing with that resolution, it's going to have to look different. I'd say to investors today 'yes, you've seen some precedents to a resolution, but don't say that's going to happen for every other bank – even Capitec, which is deposit funded. You're going to have to wrap around some structures to keep the positive confidence there. .ALEC HOGG: They've handled it well, in your opinion?.MATTHEW PIRNIE: Excellently. According to the G20 and IMF Principles on Resolution, they've done everything by the book, they've been clear, and they've stopped a big market disorderly default. From that point of view, they've done very well.
