Abstract
Concerns about South Africa' s growth potential and macroeconomic stability
have been highlighted by
Fitch and Standard & Poor' s decision to downgrade
the country' s external credit rating outlook to
' negative' from ' stable'
on November 11 2008. While it is currently not our core scenario that
South
Africa will slip into a full-blown recession over the course of
2009, the country' s open economy and
financial markets could be more
heavily exposed to the downturn in external conditions than
currently
anticipated.
Moreover, as mentioned in several meetings, increasing
uncertainty surrounding South Africa' s future
political direction will
bode ill for investor confidence and much-needed portfolio inflows over
the
medium term. This is because at times of high volatility and worsening
investor sentiment, any
deterioration in South Africa' s political
conditions and policy credibility will negatively affect the
country' s
financial markets, with likely negative repercussions for the country' s real
economy.
Recession scenarios and political risk put aside, one of South
Africa' s greatest assets is the robustness of
its domestic banking sector,
a key advantage which is likely to greatly reduce the risk of a recession.
For sure, as highlighted by the South African Reserve Bank (SARB)' s most
recent financial stability
report, commercial banks' profitability
declined noticeably over the course of H108, mainly on the back
of rising
interest rates and tighter credit conditions. Indeed, key profitability
ratios, such as return on
assets and return on equity, fell to 1.76% and
17.48% at the end of Q208, respectively, which marked a
significant
decrease from 2.44% and 24.12% at the beginning of the year. At the same time,
credit risk
has been on the rise, with the percentage of non-performing
loans increasing to 2.6% in Q208, up from
2.0% just six months earlier.
Considering that domestic credit conditions are likely to remain tight,
banks'
profits and credit risk are likely to come under further pressure
over the course of 2009. Furthermore,
although commercial banks' foreign
debt levels are relatively low (8.5% of GDP), almost 84.0% of
external
liabilities have short-term maturities. This means that refinancing costs are
likely to be noticeably
higher in light of surging international borrowing
costs, thus potentially reducing banks' profitability
ratios further going
forward.
That said, the South African banking sector is by no means as
over-leveraged as Eastern European banks,
for example, and stringent
regulations have prevented South African banks from gaining exposure to
the
US subprime disaster. First, commercial banks' aggregate capital
adequacy ratio stood at a relatively
robust 12.5% in Q208, which is above
the reserve bank' s prescribed 9.75% threshold and marks an
improvement
from 11.70% at the beginning of 2008. Second, the loans-to-deposit ratio came
in at 97.0%,
while deposits as a percentage of total liabilities amounted
to 85.0%, providing a solid lending basis and
much-needed confidence in
the currently volatile international climate. With depositors' trust in
the
banking sector not having been undermined so far, the potential for a
run on the banks and an ensuing
banking crisis remains relatively limited,
at least over the medium term. Against this backdrop, South
Africa is
significantly better protected from a potential recession than countries which
could experience a
disappearance of capital in the wake of a collapsing
banking sector.
From Q209, we will include data that pertain to late 2008
and will extend forecasts out to 2013. We will
also incorporate much
greater discussion of the various protagonists in each country’s
commercial
banking sector and a number of new features. We believe that
the figures we compiled in mid-2008
provide insights as to how the various
commercial banking sectors will fare in the current, extremely
uncertain,
environment. We have therefore left them essentially unchanged.
The
figures on the tables above provide a snapshot of the banking sector in South
Africa prior to the onset
of the global financial crisis. To place the
figures in context, it may be useful to bear in mind certain
aspects of
the 59 countries whose banking sectors are currently surveyed by BMI. Across
this sample, the
median growth in assets in local currency terms was 21.3%
(in Colombia). The median loan growth was
21.6% (in India). The median
growth in deposits was 17.9% (in Brazil).
On their own, the ratios of
loans to deposits, assets and GDP mean little. However, they can provide
useful hints when combined with other data. Across the 59 countries, the
median loan/deposit ratio is
92.3% (in Greece). The median loan/asset
ratio is 56.0% (in Poland). The median loan/GDP ratio was
63.9% in
India.
Since Q108, we have calculated, on a consistent basis, a Commercial
Bank Business Environment Rating
(CBBER) for each of the 59 countries
surveyed. The CBBER includes an assessment of the limits of
potential
returns. It does this by taking into account the size, growth potential and
bancassurance
potential of the banking sector, as well as aspects of the
economy in 2007. The CBBER also depends on
an assessment of the risks to
the realisation of potential returns. This reflects BMI’s assessments
of
overall country risk, together with the regulatory and competitive
environment.
CBBER for South Africa
South Africa’s overall CBBER
is 67.8. Within the limits of potential returns, the banking market
structure
is higher than the country structure – with scores of 71.9
and 56.5, respectively. Within the risks to the
realisation of potential
returns, the banking market elements are again somewhat higher than the
country
elements – with respective scores of 86.7 and 63.4.
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