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Moody's assigns (P)Baa3 and A2.za to FirstRand Bank's Basel III-compliant subordinated debt

May 11, 2014



Moody's Investors Service has today assigned a

provisional (P)Baa3 rating to the proposed issuance of up to ZAR2 billion

of subordinated notes from FirstRand Bank Limited's (FRB; deposits A3

negative, bank financial strength rating C- stable/baseline credit

assessment baa1) ZAR50 billion domestic MTN programme. The Basel

III-compliant notes will feature contractual loss-absorption features at

the point of non-viability, which will be replaced by a statutory

loss-absorption regime once it is introduced in South Africa. The rating

outlook for the notes is negative, in line with the negative outlook for

the bank' deposit and senior debt ratings.

Moody's has also downgraded the provisional subordinated debt ratings

assigned to the bank's domestic MTN and EMTN programmes to (P)Baa3 from

(P)Baa2, as going forward any new Tier 2 drawdowns must include

contractual provisions for either conversion to shares or write-down in

order to be included as regulatory capital.

Concurrently, Moody's has also assigned a national scale rating to FRB's

proposed subordinated notes of A2.za, while the subordinated debt rating

under its domestic MTN programme was downgraded to A2.za from A1.za, in

line with Moody's mapping framework of national scale ratings to global

scale ratings.

RATINGS RATIONALE

The assignment of provisional (P)Baa3 rating to FRB's proposed Basel

III-compliant subordinated notes' is two notches below FRB's baseline

credit assessment. This is in line with Moody's standard notching

guidance for subordinated debt that includes contractual loss-absorption

features triggered at the point of non-viability. The additional notch

lower relative to the ratings assigned to FRB's outstanding plain-vanilla

Basel II-compliant subordinated debt, reflects the contractual nature of

the loss-absorption provisions and potential uncertainty associated with

the timing of the loss absorption, as the South African Reserve Bank has

yet to define the point at which it would deem banks to be non-viable.

Moody's understands that the proposed subordinated notes will qualify as

Tier 2 capital under Basel III, and are likely to have a maturity of 10

or 12 years with an issuer call option after five or seven years

respectively. FRB will issue these notes to replace the existing legacy

Tier 2 debt, which phases-out over 10 years. The contractual

loss-absorption features of the notes will no longer apply once a

statutory loss-absorption regime is officially implemented in South

Africa, at which point the relevant legislation will govern these notes.

There is no impact from today's rating action on the existing Baa2 and

A1.za ratings assigned to any outstanding subordinated notes that the

bank has issued under its MTN programme.

Going forward, Moody's expects only Basel III-compliant subordinated debt

securities to be issued under the bank's MTN programmes.

WHAT COULD MOVE THE RATING UP/DOWN

Moody's believes that there is limited scope for any ratings upgrade of

either FirstRand's deposit ratings, or the provisional ratings on the

senior and subordinated debt. This reflects the downside risks stemming

from the challenging economic conditions in South Africa and the negative

outlook assigned, despite the bank's strong performance in the first six

months as of December 2013. FirstRand's rating could be downgraded if (1)

its financial performance -- specifically its asset quality and/or

earnings indicators -- weaken substantially from their current levels;

(2) it faced any funding and liquidity issues; and/or (3) key parts of

its franchise and risk management weakened in any way. The bank's ratings

could also be downgraded if the South African sovereign rating were to

be downgraded from the current Baa1.

PRINCIPAL METHODOLGIES

The principal methodology used in this rating was Global Banks published

in May 2013. Please see the Credit Policy page on www.moodys.com for a

copy of this methodology.

Moody's noted that on 1 May 2014 it released a request for comment in

which the rating agency has requested market feedback on potential

changes to its Credit Rating Methodology for non-viability contingent

capital securities. If the revised Credit Rating Methodology is

implemented as proposed, the Credit Ratings on FRB's Basel III-compliant

Tier 2 notes are unlikely to be affected. Please refer to Moody's

Request for Comment, titled "Moody's Proposed Approach for Rating Bank

'High Trigger' Contingent Capital Securities and Revisions to Framework

for Rating Non-viability Contingent Capital Securities: A Proposed

Update to Moody's Global Banks Rating Methodology," for further details

regarding implications of the proposed Credit Rating Methodology changes

on Moody's Credit Ratings.

FirstRand Bank Limited is headquartered in Johannesburg, South Africa and

at the end of December 2013 had total assets of ZAR799 billion ($76

billion).


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Source: EMBIN (Emerging Markets Business Information News)


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