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Demands for deposit insurance at banks gain further support

09 June 2009 PricewaterhouseCoopers (PwC)

PricewaterhouseCoopers (PwC) has released it 11th survey on banking in South Africa and continues with the theme of Strategic and Emerging Issues in “South African Banking”, at a time of probably the most severe global financial crisis we have experienced.

Banking and Capital Markets leader, Tom Winterboer states: “this survey provides insights on the banking industry and how banking in South Africa could evolve over the next three years”.

The survey has been developed by PwC, and researched and prepared by Dr Brian Metcalfe, associate professor in the Business School at the Brock University, Ontario, Canada. It incorporates the viewpoints of CEO’s and senior executives from 23 banks, both domestic (11) and foreign-owned (12).

Winterboer says that an interesting contrast between the 2007 survey and the 2009 survey relates to regulation. In the 2007 report, the regulatory environment was considered to be the most important driver of change. At that time, the banks were in the midst of their respective Basel II implementations and not surprisingly, felt overburdened with the pace of new regulations. In this survey, the banks acknowledged that some of the new legislation such as the National Credit Act helped to slow the expansion of consumer credit.

The insight into, as well as the tight regime imposed by the Registrar of Banks were often complimented and regarded as positive contributors in South African banks that weathered the global financial crisis. Early adoption of Basel II requirements were viewed by the respondents as positive, and they believe that Basel II has improved risk management in terms of capital adequacy, market risk, credit risk and operational risk.

Participants, however, commented on the need for further focus on risk management systems, as well as integration of these into other systems at banks.

A finding of particular interest in this year’s survey is the increasing support for deposit insurance by banks operating in South Africa. 15 of the participating banks, nearly 70%, are in favour of deposit insurance. The last member of the OECD countries, comprising 30 member countries (of which South Africa is not a member) implemented deposit insurance in 2008. Now may well be the appropriate time for implementation of deposit insurance in SA.

A significant finding in the report relates to the retreat of certain foreign banks from South Africa. This move is the result of the global financial crisis, which has forced foreign banks to consider the markets closely and reconfigure their future strategy. Only six foreign banks were judged to have a strong commitment to the South African market at present. For the first time in 2009, the majority of banks considered it unlikely that there would be further foreign bank investments in the Big Four.

One of the most controversial sections of this survey relates to criticism of the banking industry by participating banks. A number of banks expressed unhappiness with mortgage originators and their control of the mortgage market, as well as the need for banks to become more efficient in this market, as it is difficult to wrestle away control from the originators at a time of overcapacity.

The banks continue to acknowledge that there is room for improvement in service quality and customer service. Some of the participating banks also criticised the retail banks and their need to be more engaging in debt counselling, as required by the National Credit Act. A few participants further referred to the need for the major banks to better service the previously unbanked market.

Concerns were raised about the declining quality of banks’ lending books and the fact that credit will become less available, whilst margins widen. The three most important drivers of change were identified as the global financial crisis, the economic cycle and funding constraints. All banks have seen an increase in the cost of funding. Funding will also become more challenging for the smaller domestic banks.

Banks, however, remain committed to growing service points; ATM’s are expected to grow by 16%,and branches by 5% over the next three years. Markets, where rates of growth are expected to decline include: predictability, car financing, mortgages and credit cards.

The survey also requests respondents to rank peers and competitors in various operating sectors. Standard Bank was rated first in 12 (two shared) of the 23 categories.

Winterboer says the PwC survey hopes to raise awareness of strategic issues facing banks in SA, establish data on SA trends, encourage debate on how to capitalise on these developments, and improve performance in the banking sector.

Winterboer concludes, “Both domestic and foreign banks expressed almost identical weightings on the importance of issues such as crime, Reserve Bank independence and the recruitment of top-quality personnel.

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