Moody’s rating agency has downgraded the Land Bank to junk status, as well as revising its outlook to negative.
The bank’s long-term issuer ratings was altered from Baa3 to Ba1, making it the first state-owned enterprise to be rated below investment grade by the agency.
Ba1 is one notch below investment grade as well as one notch below South Africa’s sovereign rating, which the agency kept at Baa3 in November, although they changed our outlook to negative.
Other state-owned enterprises such as Transnet and Eskom remain at Baa3.
“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.
Moody’s warned a downgrade of the bank was on the cards in November, saying its profile was riskier than average compared to the rest of the global banking sector.
Its assets quality, an increase in non-performing loans, and its capital adequacy levels presented are among the reasons for the change.
Non-performing loans, where clients have either defaulted or are in risk of defaulting due to late payments, increased by 3.6% to 17.9% in the 2019 financial year.
Impaired loans grew from 6.7% to 8.8% in 2018.
The Bank cited the drought, which has created economic problems for farmers, as a reason.
Moody’s also noted uncertainty regarding the bank’s CEO as a factor in its decision. The Bank last had a permanent CEO in December 2018, with acting CEO Konehali Gugushe resigning earlier in the month.
“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.