27 May.
Regulation of SA banks.
The quality and conservatism of banking regulation and prudential supervision of banks in South Africa has been positive for the banking system in the view of rating agency Standard & Poor’s.
“In particular, we believe tight regulation helped protect South African banks from the most severe effects of the global financial crisis,” Standard & Poor’s primary South African bank credit analyst Matthew Pirnie said on Thursday.
He said the higher-than-average minimum regulatory capital adequacy ratios (for developed economies) and the good risk-management framework of the major banks had helped maintain confidence in domestic banks.
“South African banks already exceed the proposed Basel III minimum capital and leverage ratio requirements. Limited exposure to foreign assets due to the prudential regulation on foreign exposure (including the ‘closed’ South African rand system, which limits currency leaving the country), helped limit overall non-domestic risk such as exposure to the ‘toxic’ US-structured finance products and foreign debt.
“In addition, the National Credit Regulator enforced its affordability tests and interest rate caps for consumer loans. These safeguards against reckless practices, in our view, have had a dampening effect on credit extension during peak times,” Pirnie added.
“We see evidence of strong cross-practice cooperation between the Financial Stability Oversight Committee and the Council of Financial Regulators. In addition, the ‘Structural Funding and Liquidity Risk Task Team’ combines members of the National Treasury, the South African Reserve Bank, and the South African Financial Services Board with local banks and asset management companies. Their task is to work on identifying and solving structural funding and liquidity issues that exist within the system, essentially for Basel III implementation.”
Pirnie noted that the financial services sector is the largest contributor to the South African economy, representing 21% of GDP in 2010. Five major conglomerates dominate the sector, each of which has a bank. Together they account for 90% of banking sector assets as well as a large proportion of insurance, brokerage, and asset management services.
“Consequently while there are 18 registered banks operating in in South Africa, plus two mutual banks, 13 local branches of foreign banks, and 41 foreign banks with approved local representative offices, we consider the South African banking system to be highly concentrated and oligopolistic in nature.”
Pirnie added that competition in select markets was rising, especially for the emerging middle classes who had previously banked with banks such as Capitec (not rated) and African Bank Investments Limited (ABIL: not rated).
“Nevertheless, there is limited potential for new market participants to challenge the current competitive structure in South Africa, or restrain the long-term earnings potential of the major financial conglomerates, in our view. Their well-established brands, large branch network, and strong balance sheets create large barriers to entry,” Pirnie asserted.
The most likely point of entry would be through acquisition, he said.
He added: “We expect interest in mergers and acquisitions to pick up once the global economy stabilises and the impact of global regulation becomes clearer.
“We expect South African banks’ expansion into Africa to accelerate going forward.”
Source: Business LIVE
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