OREANDA-NEWS. S&P Global Ratings today affirmed its 'BBB-/A-3' long - and short-term counterparty credit ratings on South Africa-based Nedbank Ltd. The outlook is negative.

At the same time, we affirmed our 'zaAA-/zaA-1' long - and short-term South Africa national scale ratings on the bank.

The affirmation reflects our expectation that Nedbank will continue to post resilient asset quality and positive earnings, despite continued economic and industry pressures in South Africa.

We anticipate economic growth in South Africa to be a low 0.6% in 2016 after anumber of external and domestic factors converge. External factors include weak external demand and adverse terms of trade, and domestic factors include drought, subdued mining and manufacturing output, restrained household spending and structural constraints from infrastructure bottlenecks, plus the widening socio-economic gap. Over the longer term, we expect growth will return to a still-modest 1.5%-2.1% range.

Furthermore, the weaker exchange rate and higher electricity prices have fueled inflation and the central bank is consequently in a slow monetary tightening cycle. As a result, we expect that the ratio of debt service to disposable income of South African households will rise to 10.2%-10.4% in 2016, the highest level since 2008. In light of this, we think household assetquality across the sector will deteriorate once again in 2016, albeit not to the lows of 2008.

In this context, we expect Nedbank Group's (our analysis of the bank incorporates group figures) financial performance will remain fairly resilient, albeit with anticipated deterioration in asset quality and lower growth in profitability in 2016 and 2017. In particular, we forecast the following over 2016 and 2017:

Cost of risk of 0.8%-1.0%, slightly ahead of figures for top-tier domesticpeers.

A risk-adjusted capital (RAC) ratio before adjustments at between 6.0% and6.5%, slightly below those of top-tier domestic peers, but improved from current levels by stable internal capital generation and additional tier 1issuance.

Return on assets (S&P Global Ratings' calculation of core earnings to average adjusted assets) stabilizing at around 1% over the next 12-18 months, slightly below levels of domestic peers due to muted earnings contributions from the bank's Ecobank Transnational relationship.

Our opinion of Nedbank's asset quality reflects the bank's relatively robust loan portfolio, cautious growth in household lending over the past few years, and our continued expectation that corporate lending will be a relatively strong performer (outside the commodities and mining sector, which makes up a modest proportion of lending). We still see some higher risk in the bank's commercial real estate concentration, but Nedbank's cautious lending practicesand the robust performance of this asset class are strong mitigating factors. Nedbank's provisioning is broadly in line with domestic peers' but despite itshigh collateralization, we view its overall coverage as modest.

Like all of the top-tier South African banks, Nedbank continues to face high funding and liquidity risks, caused by the wholesale concentrations in its funding base. Although the risk is mitigated by exchange controls and the bank's role in clearing and prepayments of the rand, plus limited external or foreign currency funds, the risk remains pertinent.

The bank's parent, Nedbank Group Ltd., is currently 54% owned by Old Mutual Life Assurance Co. (South Africa) Ltd., a member of one of the largest financial service groups in Africa. Due to the significant restructuring underway at Old Mutual group, we expect its stake in Nedbank to be about 15%-20% in the next 12-24 months. This would likely have no impact on our ratings on the bank.

The negative outlook reflects the negative outlook on South Africa (foreign currency BBB-/Negative/A-3, local currency BBB+/Negative/A-2) and our view of the negative economic risk trend for the South African banking industry.

We would lower the long-term ratings on Nedbank if we lowered our ratings on South Africa. This could happen if GDP growth does not improve beyond our currently low expectations, or funding of external and fiscal deficits becomesmore difficult. We could also lower the ratings if credit risks start to materialize more actively. These risks could stem from weakening asset quality, or increases in inflation and interest rates that start to strain theratio of debt service to disposable income of households beyond our current expectations. Moreover, we could lower our ratings on the bank if we see a deterioration of capitalization (due to higher risk weighting or greater-than-anticipated asset growth) below the 5% mark under S&P Global Ratings' RAC model or profitability at the bank or group level started comparing poorly with domestic peers'.

We would revise the outlook to stable if we took the same action on the sovereign, and if credit risks in the economy started to dissipate. This couldbe triggered by government policy implementation, resulting in improving business confidence and higher private sector investment that contribute to brisker GDP growth. However, this would only occur if Nedbank's profitability, asset quality, and capitalization perform in line with our expectations. Over the longer term, we could also revise the outlook to stable if the bank buildsadditional loss-absorbing capacity, and we consider that the domestic bank resolution regime is effective.