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AfricaAugust 1 2004

A picture of health

South African banking is on the right path for achieving its economic efficiency and consumer protection targets. South Africa’s banking sector is in good health, with banks well-capitalised and the total balance sheet growing markedly during 2003, according to a report released in July by the bank supervision department of the South African Reserve Bank.
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During 2003, South African banks remained well capitalised. Although the average risk-weighted capital-adequacy ratio for the sector decreased marginally to 12.2% at the end of 2003, compared with 12.6% in 2002, it remained above the statutory required level of 10%. The average aggregate capital and reserves held by the banking sector in 2003 amounted to R104bn ($16.9bn), up 5.8% from the year before.

Growth in the total balance sheet increased sharply during 2003. Banks’ total funds rose by 25.2% to R1377.6bn. At the end of the year, the four biggest banks – Absa, FirstRand, Nedbank and Standard Bank – held about 81% of the sector’s assets. Foreign bank participation increased from 6.9% in 2002 to 8.7% of total sector assets at the end of 2003.

The return on equity (ROE) and the return on assets (ROA) of the total banking sector increased during 2003. By the end of December 2003, the average ROE was 10.9%, up from 5.6% in 2002, and the ROA rose from 0.5% in 2002 to 0.7% in 2003. The interest margin fell to 3.3% in 2003, from 3.8% in 2002.

The sector’s efficiency also improved, with the cost-to-income ratio falling from 67% in 2002 to 65.8% in 2003, although this was short of the Reserve Bank’s international benchmark of 60%.

The banks maintained adequate levels of liquidity during 2003. By year-end, their liquid assets amounted to 114.7% of liquid assets required to be held, compared to 118.1% the year before.

Total gross overdues of the banking sector decreased by R2.4bn, to R23.8bn (2.4%) by the end of 2003. According to the Reserve Bank report, banks’ provisioning against these non-performing loans was adequate, even when benchmarked against international requirements.

Black empowerment

Last year, the Financial Sector Black Economic Empowerment Charter was unveiled. It is a voluntary undertaking by the major financial institutions to meet agreed targets for black ownership and management, and for extending banking services and credit to the unbanked sector. Errol Kruger, registrar of banks at the Reserve Bank, concludes that the charter sets reasonable black economic empowerment objectives, albeit ambitious, without sacrificing financial soundness or unduly increasing risk in the banking sector.

There are fears that the charter might affect profits because of the obligation to extend services and credit to less profitable markets, as well as increased training costs to meet black staff targets. There are also worries that existing shareholdings would be diluted to facilitate black ownership. But, despite these concerns, black economic empowerment is an unavoidable reality in South Africa. The report points out that it might also trigger other changes, such as innovative use of mobile phones to deliver services.

A contentious point is the degree to which foreign banks operating in South Africa would have to participate in the charter, particularly in respect of ownership targets. Foreign banks will be permitted to invest a larger amount in the financing of empowerment deals instead of being obliged to sell part of their business to black shareholders.

Responsive to change

“The challenge of black economic empowerment and broadening access to finance has to be addressed in the context of the overriding regulatory objective of achieving a high degree of economic efficiency and consumer protection in the economy, through securing systemic stability in the financial sector and the broader economy,” says Mr Kruger. “The financial sector has been proactive in responding to the need for change in South frica. Although one may argue that change at too slow a pace may destabilise the sector, change at too great a pace may pose an even greater threat to financial stability. It would appear that the charter has achieved an optimal balance.”

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