Fitch Ratings has affirmed Absa Group Limited's (ABG) and its main operating subsidiary's, Absa Bank Limited (ABL), Long-Term Issuer Default Ratings (IDRs) at 'BB-'.

The Outlooks are Stable. A full list of rating actions is below.

All ratings have been withdrawn for commercial reasons. Fitch will no longer provide ratings or analytical coverage of ABG or ABL.

Key Rating Drivers

The IDRs and National Ratings are driven by the entities' standalone creditworthiness, as expressed by their Viability Ratings (VR) of 'bb-'. The VRs reflect ABG's strong regional franchise with diversified earnings, comfortable capital buffers and stable asset quality, funding and liquidity. However, the VRs are one notch below the 'bb' implied VRs, reflecting constraint from the operating environment and sovereign. This underlines the concentration of their activities in South Africa (end-1H22: 84% of ABG's total assets) and high sovereign-related exposure relative to equity (around 2x for ABL at end-1H22). The Stable Outlooks on their Long-Term IDRs reflect that on South Africa's rating.

ABG's and ABL's National Ratings with Stable Outlooks reflect our view that their creditworthiness in local currency relative to that of other South African issuers is unchanged.

VRs Equalised with 'Group VR': ABG's VR reflects its consolidated risk profile, which in turn is underlined by acceptable double leverage (end-2021: 108%), as well as high capital and liquidity fungibility within the group. ABL represents the dominant part of ABG (83% of total assets at end-1H22) and therefore its VR is also aligned with ABG's consolidated risk profile.

Global Risks Will Weigh on Growth: Fitch expects South Africa's GDP growth to fall to 1.9% in 2022 and 1.6% in 2023 as commodity prices wane and the global economy slows. Rising inflation and electricity supply issues will also constrain growth. We forecast policy rates to reach 6.5% in 2022 and peak at 7% in 2023, supporting banks' interest revenue. However, rising interest rates and inflation could moderately pressure asset quality as households' resilience wanes. We do not expect South Africa's potential grey listing by the Financial Action Task Force to have a meaningful impact on banks' operations.

Strong Franchise; Sound Execution: ABG's strong domestic franchise is underpinned by its core banking subsidiary, ABL (21% market share of domestic assets) as well as its regional operations, mainly in southern and eastern Africa, which provides moderate earnings diversification (22% of group operating income in 1H22). ABG continues to successfully execute on its post-Barclays strategy, which supported a strong performance in 1H22, despite recent leadership disruption.

Stable Asset Quality: ABG's Fitch-adjusted impaired (IFRS 9 Stage 3) loans ratio was stable at 6.3% at end-1H22 but remains above that of peers. We expect the ratio to remain above 6% for 2022 given operating environment uncertainty but below the level at the height of the pandemic (end-2020: 7.3%). Reserves coverage of impaired loans was broadly stable and in line with peers' at 67% at end-1H22 (end-2020: 66%).

Improving Profitability: ABG's annualised operating profit/risk weighted assets (RWAs) increased to 3.4% in 1H22 (2021: 2.9%), well above its pre-pandemic level (2019: 2.5%). This was driven by further margin expansion, a strong recovery in insurance revenue, and well-controlled costs. ABG's cost/income improved to 55% in 1H22 (2021: 59%). Loan impairment charges will remain high (25% of pre-impairment operating income in 1H22) given rising rates and inflationary pressures.

Moderate Capitalisation: ABG's common equity Tier 1 (CET1) ratio (excluding unappropriated profits) of 11.9% at end-1H22 (end-2021: 12.2%) was comfortably above the 8.5% minimum regulatory requirement, but below that of peers.

Stable Funding and Liquidity: ABG's Fitch-adjusted loans/customer deposits at end-1H22 was 95%, below pre-pandemic levels (end-2019: 110%), and is in line with the peer average, but is expected to increase as loan growth outpaces deposit growth. Customer deposits comprised 70% of non-equity funding at end-1H22 and are stable.

Similar to peers', ABG's funding profile exhibits a low reliance on foreign-currency funding. Liquidity buffers are comfortable, while its liquidity coverage ratio of 121% and net stable funding ratio of 113% at end-1H22 were well above minimum regulatory requirements.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Negative rating sensitivities are no longer relevant given the rating withdrawal.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Positive rating sensitivities are no longer relevant given the rating withdrawal.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

ABL's senior unsecured debt is rated in line with its IDRs (or National Long-Term Rating) as the likelihood of default on these (local currency) obligations reflects the likelihood of default of the bank.

ABG's senior unsecured debt is rated one notch below its National Long-Term Rating to reflect below-average recovery prospects because of thin qualifying junior debt buffers.

ABG's subordinated debt is rated two notches below its anchor VR for loss severity, reflecting poor recovery prospects. The debt does not meet Fitch's criteria (including a sufficient qualifying junior debt buffer) for alternative notching.

ABL's Government Support Rating (GSR) of 'b+' reflects a limited probability of support from the South African authorities, if required. This considers ABL's position as a domestic systemically important bank, but also the likely adoption of bank resolution legislation in South Africa. Once the resolution framework is implemented, Fitch expects the South African authorities' propensity to support the banking system will no longer be certain.

ABG's GSR of 'no support' reflects Fitch's view that sovereign support is unlikely to extend to it as a bank holding company, due to its low systemic importance and liability structure, including foreign/wholesale funding, which could be politically acceptable to bail-in.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Rating sensitivities are no longer relevant given today's ratings withdrawal.

VR ADJUSTMENTS

The business profile Score of 'bb+' is below the 'bbb' category implied score for ABG and ABL due to the following adjustment reason: business model (negative).

The asset quality score of 'bb-' is above the 'b' category implied score for ABG and ABL due to the following adjustment reason: underwriting standards and growth (positive).

The capitalisation and leverage score of 'bb-' is above the 'b' category implied score for ABG due to the following adjustment reason: risk profile and business model (positive).

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on ABL and ABG, either due to their nature or the way in which they are being managed by ABL and ABG. Following the rating withdrawal Fitch will no longer provide ESG Relevance Scores for ABL and ABG.

For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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