South African banks strong and ready for growth

The South African banking system has not only survived the global credit crisis and the resulting sovereign debt crisis - it is poised for growth.

This is one of the key findings of a Standard and Poor's (S&P's) report titled ''Analysis of South African Banks and the Challenges Facing Key Emerging Market Banking Systems".

The report found that the South African banking industry has several key strengths, notably the dominance of large banking groups with well-developed risk management systems. Secondly, the industry is well served by sound domestic regulation and supervision. Lastly, the local industry is helped by limited exposure to international funding and non-domestic, asset-backed securities.


However, the local industry has some weaknesses as well, and major threats to the banking sector are manifold. According to the ratings agency, they range from increased impairments as a function of deteriorating loan portfolio quality, a weak economy restrained by low wealth levels, and high unemployment.

"The local industry is characterised by a unique trait compared to its peers in that it has a sophisticated high-end market with a fairly large appetite for sophisticated products. However, there are also high income and wealth inequalities as well," said S&P's Matthew Pirnie.

Even with these handicaps, the domestic industry still compares favourably to some of its emerging market peers, particularly those in central and eastern Europe.

The South African economy is more diversified than those of most comparable countries in this study: Nigeria, Russia, Brazil, Kazakhstan, Ukraine and Israel.

S&P's Ekaterina Trofilmova said the global financial crisis was caused by an erosion of confidence, and was accompanied by severe liquidity problems.

SA was spared mainly because ample liquidity was supported by sufficient deposits.

As a percentage of the funding base, deposits have remained relatively constant at around 90%, whereas the loan-to-deposit ratio peaked at 115% just before the financial crisis. This key ratio has subsequently come down.

Although there is a belief that SA suffers from a dearth of savings, the S&P's BICRA argues that SA's savings level is better than that of the West, although it lags the rates of its peers.

With all these positive trends, it is reasonable to expect foreign takeovers of local banks by one or more of the international behemoths. However, according to Konrad Reuss, managing director of S&P's South Africa and Sub-Saharan Africa, there is more likely to be an expansion of South African banks into the rest of Africa.

Source: Business Day