Briefing to Portfolio Committee on Economic
Development
Yves Lemay and Sean Marion
18 November 2014
Agenda
1. Moody’s Credit Rating System
2. Sovereign Credit Ratings
3. Bank Credit Ratings
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Moody’s Credit Rating System
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About Moody’s
We are one of the World’s Leading Independent Global Provider of Credit Rating Opinions
and Insight on Credit Risk Measurement and Management for over 100 years
» Provide credit ratings and analysis on
– 136,000 corporate, government and structured finance securities
– 10,000 corporate and financial institution relationships
– 100+ sovereign nations
» Extensive credit opinions, deal research and commentary reach
– 5,000 Institutions
– 30,000 client users
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Credit Ratings Speak to Credit Risk
» A Moody’s credit rating is an opinion on the relative likelihood of an
issuer to pay its debt
» Moody’s ratings assess Expected Loss
 (probability of default) x (severity of loss in case of default)
» Moody’s recognises three types of default events
– Bankruptcy
– Missed interest or principal payment
– Distressed exchange
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Role of Rating System
Promote dialogue and debate
» A point of reference easily understood by market professionals
» Market commentary that helps flow of relevant information
» Improve understanding of credit risk, which promotes market integrity and efficiency
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Moody’s Symbol System
The rating scale
Moody’s rating system
provide a rank ordering of
relative creditworthiness.
» 6 broad categories; 21 refined
categories,
» Long & Short term ratings
» Further refined by Watchlists
and Outlooks
long term
short term
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Prime-1
Prime-2
Prime-3
Ba1
Ba2
Ba3
B1
B2
B3
Not Prime
Caa1
Caa2
Caa3
Ca
C
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What does Moody’s rate?
Corporate bonds
Syndicated bank loans
Sovereign nations
Municipal obligations
Infrastructure projects
Structured transactions
Bank deposits
Mutual funds
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Important Features
 To meet market needs, credit rating systems have evolved over time:
 Opinions about the future, not statements about the present…
 …made available contemporaneously and free of charge to the market,
and
 Predictive, stable forecasts of relative credit risk
o Low (absolute) ratings in advance of default
 Broad coverage across markets and industries, enables
comparability
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Moody’s Investors Service in South Africa
» Assigned 1st time rating to Republic of South Africa – 1994
» Introduced the Moody’s South Africa National Rating Scale – 2001
» Opened local office in Johannesburg – 2003
» Registered by South African Financial Services Board as CRA – May 2014
» Leading coverage among international rating agencies in South Africa
» Includes ratings on:
– Sovereign
– Sub-Sovereign
– Project & Infrastructure Finance
– Corporate Finance
– Financial Institutions
– Structured Finance
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Summary of Primary Issuance and Monitoring
Primary Issuance
Initial Rating
Assigned
Public Dissemination
(Press, Website)
Rating
Committee
Monitoring
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Summary of Credit Assessment Considerations
QUALITATIVE
ANALYSIS
Management
Strategic Direction
Financial Flexibility
QUANTITATIVE ANALYSIS
Financial Statements
Past Performance
Future Projections
MARKET POSITION
COMPETITIVE TRENDS IN SECTOR
Global / Domestic
REGULATORY ENVIRONMENT
Global / Domestic
SECTORAL (INDUSTRY) ANALYSIS
SOVEREIGN MACRO-ECONOMIC ANALYSIS
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Sovereign Credit Ratings
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Our Sovereign Portfolio
» Started rating national governments in the 1920s
» Currently rate close to 130 national governments worldwide
» 20 countries rated in Africa
» Assigned first time rating on the debt issued by the Government of South
Africa in 1994
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BRICS – Sovereign Ratings
Aaa
Aa3 Stable
Baa2 Stable
Baa2 Negative
Baa2 Negative
Baa3 Stable
Caa3
China
South Africa
Brazil
Russia
India
Source: Moody’s
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Moody’s Sovereign Credit Analysis - Framework
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South Africa
Stable Rating Outlook – Key Factors
» At Baa2, rating appropriately captures anticipated low growth outlook and public sector
debt trends in the coming years.
» Sheer size of the economic base, wealth levels and natural resources endowment
» Commitment on the part of the government to address key economic challenges
» Structural impediments to growth
» Reigning in the deficit through strict controls on spending
» More financial discipline for state-owned enterprises
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Key Drivers for the Rating
1. Constrained Growth Prospects
2. Growing Public Sector Debt
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Key Rating Driver – Constrained Growth Prospects
2004-08 avg : 4.9%
6.0
5.0
2010-14F avg : 2.5 %
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
2004
2005
2006
Source: Haver Analytics, South Africa Reserve Bank, Moody’s
2007
2008
2009
2010
2011
2012
2013
2014F
» Sharp deceleration, far below the growth level needed to lower high unemployment
» Medium Term growth outlook materially constrained by energy shortages, high interest
rate levels and poor investment climate
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Key Rating Driver: Growing Public Sector Debt
Gen. Gov. Financial Balance as a % of GDP
» Financial Balance remaining significant
South Africa (Baa1)
Baa Median
2.0
» Compares unfavourably relative to other
Baa-rated countries
1.0
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
-6.0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014F 2015F
2013
2014F 2015F
Source: Haver Analytics, National Treasury, Moody’s
Gen. Gov. Debt as a % of GDP
» Increasing debt burden due to poor
growth and deficit financing needs
» At 50%, materially higher than peers
South Africa (Baa1)
Baa Median
60.0
50.0
40.0
30.0
20.0
10.0
0.0
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: Haver Analytics, National Treasury, Moody’s
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Market Indicators
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Bank Credit Ratings
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Moody’s Bank Rating Universe
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How a Moody’s Bank Rating is ‘Built’
Standalone
Strength
•Franchise Value
•Risk Positioning
•Operating
Environment
•Regulations
•Financials
Government
Support
•Willingness to
support
•Capacity to
support
Debt &
Deposit
Ratings
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Elements in Determining the Standalone Strength
Franchise
Value
Risk
Positioning
• Defensible
franchise
sustains
recurring
earnings
• Controlling
credit,
market and
operational
risk
• Quantitative
(numbers
based)
assessment of
earnings
stability,
diversificati
on, and
market share
• Quantitative
and
qualitative
(comparison
of facts)
assessment of
corporate
governance,
credit risk
concentration
, and
liquidity
management.
Operating
Environment
Why
is it important?
• Economic
landscape
Regulatory
Environment
• Banking
regulatory
oversight
• Qualitative
• Quantitative
How is itof
measured?
assessment of
assessment
regulatory
growth
independence,
dynamics and
credibility,
macro risk
and
enforcement
power
Financial
Fundamental
s
• Financial
performance
• Quantitative
assessment of
profitability
, liquidity,
capital
adequacy,
asset quality
and
efficiency
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Government Support
Willingness to
support
Capacity to
support
Track record of
supporting
troubled banks
Sovereign rating
(resources to
bail-out banks)
Public policy
signals on
bailing-out or
bailing-in banks
Size of the
banking sector
relative to
government
resources
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Global Distribution of Bank’s Standalone Strength
14%
Average
standalone
strength for South
African banks
12%
11.6%
10.4%
10%
9.0%
8.3%
8.2%
7.8%
8%
7.3%
6.9%
6.6%
6.7%
6%
4.1%
3.9%
4%
2.5%
2.5%
1.8%
2%
1.1%
0%
0.0%
0.0%
0.0%
aaa
aa1
2
aa2
3
1
1.1%
0.1%
aa3
4
a1
5
a26
a37
baa1
8
baa2
9
baa3
10
ba1
11
ba2
12
ba3
13
b1
14
b2
15
b3
16
caa1
17
caa2
18
caa3
19
ca
20
c
21
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South Africa and BRICS: Average Bank Ratings
Comparison
Bank Standalone Strength
Parental Support
Government Support
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca
C
South Africa (Baa2)
Brazil (Baa2)
Russia (Baa2)
India (Baa3)
China (Aa3)
Source: Moody’s Investors Service
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Yves Lemay
+44.20.7772.5252
Managing Director
yves.lemay@moodys.com
Sean Marion
+44.20.7772.1056
Associate Managing Director
sean.marion@moodys.com
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