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  • Lafferty says in back-testing its research model through the financial crisis, it found that there was no relationship between sovereign credit ratings and bank quality.

South African banks held onto their status as the most sound in the world for a second year, according to a global benchmark, despite a downgrade in their credit ratings in line with the sovereign.

A decision by ratings agencies to downgrade banks in line with SA’s credit profile was not a reflection of the fiscal soundness of banks, according to Lafferty’s 2017 Global Bank Quality benchmarking study issued on Monday. The study was in line with the World Economic Forum’s latest competitiveness report, which ranked SA’s banks as the second most sound in the world, behind Finland.

Global banks were increasingly looking for managerial solutions and expertise from within SA, Lafferty chairman Michael Lafferty said.

Capitec was again rated the best bank globally, receiving a five-star rating by the study. Barclay’s Africa received a four-star rating, with FirstRand, Nedbank, Absa and Standard Bank receiving three stars.

The study, which is based on an assertion that traditional methods of assessing bank strength are inadequate, ranked 100 large, listed banks in 32 countries for long-term stability and quality of service in corporate and retail banking.

The survey was largely aimed at banks themselves, rather than consumers or investors, enabling a benchmarking of bank management, Lafferty said.

When back-testing the model through the financial crisis, the study found no relationship between sovereign credit ratings and bank quality.

“Conversely, we have found that well-capitalised, conservatively managed, retail-focused banks that operate in developing economies can be higher  quality than highly leveraged, unfocused banks,” Lafferty said.

Sanlam Private Wealth analyst Renier de Bruyn said the downgrades were not a reflection of banks’ financial deterioration. While downgrades would raise borrowing costs, the effect on bank earnings would depend, among other factors, on an ability to pass costs on to customers.

“SA’s banking industry is fairly concentrated so banks should be able to pass the costs on to borrowers. This could lead to higher levels of bad debt over time, but it is too simplistic to say higher funding costs would fall straight through to the profit line.”

Both S&P Global Ratings and Moody’s downgraded the credit rating of domestic banks in 2017 in line with downgrades to the sovereign. Ratings agencies’ credibility was called into question following the financial crisis, as many gave AAA-ratings to risky mortgage-backed securities.