Johannesburg - Bank stocks fell the most in seven weeks after Finance Minister Pravin Gordhan was summoned to appear in court on fraud charges, spurring concerns the move is politically motivated and may prompt ratings companies to cut the country to junk.
The six-member FTSE/JSE Africa Banks Index dropped 3.6%, the biggest one-day decline since August 24. Nedbank Group [JSE:NED] slumped 4.4%, FirstRand [JSE:FSR] slid 4%, Standard Bank Group [JSE:SBK] shed 3.6% and Barclays Africa Group [JSE:BGA] lost 2.9%. Almost R34bn in value was wiped off the index.
“South Africa’s banks are particularly vulnerable to events that elevate political uncertainty, which in turn raises the risk that South Africa’s credit rating may be downgraded,” Nico Smuts, an analyst at 36ONE Asset Management in Johannesburg, said in response to emailed questions on Tuesday.
“A downgrade could lead to higher funding costs, which puts pressure on bank margins. Potential second-order effects of a downgrade also include weak economic growth and an increase in credit losses.”
Prosecutors alleged Gordhan illegally authorised a colleague’s early retirement and established an illicit investigative unit when he was the head of the national tax agency almost a decade ago.
Gordhan said the move is politically motivated and without merit. He is due to appear in court on November 2, one week after he’s expected to deliver South Africa’s mid-term budget.
The rand weakened as much as 3.9% against the dollar. Yields on South African government bonds due December 2026 jumped 24 basis points to 8.93%, the highest since September 2. The cost of insuring against non-payment of debt for five years using credit-default swaps rose to the highest since July, above those for Turkey and Russia, both rated below investment level by S&P Global Ratings and Moody’s Investors Service.
“When sentiment turns negative on the rand, one often sees investors switching out of domestically focused businesses such as banks and into rand hedges,” Smuts said. “The big four banks generate the majority of their revenue in rand.”
The finance minister has led efforts to help South Africa keep its investment-grade rating and is seen by international investors as a steady hand to guide the economy through the slowest growth since a 2009 recession. The Treasury’s pledge to keep spending under control and limit debt was cited as crucial for S&P Global Ratings and Fitch Ratings to avoid a cut to junk.
The court order is the latest twist in Gordhan’s struggle with President Jacob Zuma, who had dismissed Gordhan’s request to fire the nation’s current tax chief, Tom Moyane, for insubordination and delayed his attempts to install a new board at the loss-making state airline.