SA Reserve Bank’s Financial Stability Review – September 2013

• The Review states that risks to the domestic financial system from the following sources have increased from March 2013 to September 2013: Domestic labour unrest, a higher level of domestic unemployment (the improvement in Q3 13’s reading published today by Statistics South Africa is cyclical) and a search for yield in view of an expected tapering of bond purchases by the Fed (this has been postponed but remains a risk for 2014).

• Areas were risk have declined are from the Euro crisis and weaker global growth.

• A heat map has been published to show other domestic and global risks that could have a direct impact on SA’s financial system: The key risk emanates from high household debt levels.

Possible risks to financial stability:

o The FSB noted that "should the interest rate cycle turn, at the current elevated debt levels, the household sector and related credit providers exposed to this sector could be very vulnerable”. This goes some way in explaining the MPC’s willingness to tolerate higher inflation. Furthermore, the magnitude of interest rate hikes expected once the tightening in the interest rate cycle commences, is expected to be more muted compared with the period 2006 to 2008. The marginal impact of higher interest rates on consumers’ finances should be higher given the elevated debt levels, tighter lending criteria following the implementation of the NCA and a moderation in the availability of unsecured loans.

 

• The share of banks’ total assets relative to financial intermediaries has been declining since 2008, reaching 33% in 2012. That of other financial intermediaries (OFIs) – which are seen as a conservative proxy for the shadow-banking system – has increased to 22%.

 

• The Reserve Bank is looking at ways to improve disclosure in order to get a better understanding of the risks. These are overall firm-risk exposures, interconnectedness, funding concentration and aggregated maturity profiles of assets and liabilities.

 

Distribution of total assets between financial intermediaries in South Africa

• The key risks are the weak economic performance and recurring labour market tensions that could trigger a downgrade. Factors to monitor are the performance of the economy in the near future, the speed of fiscal consolidation in the next fiscal year and the occurrence and impact labour disputes.

 

• With regards to fiscal consolidation, National Treasury has again postponed fiscal consolidation in its mid-year budget in view of the moderate growth path of the economy. This has resulted in an increase in the net debt to GDP ratio forecast to 43.9% of GDP in F161/17 and an increase debt servicing costs which is crowding out other areas of spending.

 

• However, S&P and Moody’s have indicated that an imminent downgrade of South Africa’s sovereign credit rating is not expected in view of government’s commitment to fiscal discipline, the imposition of an expenditure ceiling, commitment to reign in wastage and support of certain aspects of the NDP. However, the negative outlook remains in view of the risks highlighted by the FSB.

 

• The Review warns that further downgrades may lead to the removal of SA bonds in Citi’s WGBI. The inclusion has attracted foreign capital inflows of approximately R60bn.

 

• The impact of slower growth in China and risks posed to South Africa stems from a decline in commodity prices especially those of iron and coal which are two of South Africa’s largest exports (in addition to gold and platinum).

• Tighter lending conditions were reported by 50% of banks surveyed in H1 13 compared with 25% in H1 12;

• CAR, ROEs, ROAs show that banks remain profitable and well capitalised during H1 13 and LAR’s adequate.

• Impaired advances increased 1.3% in H1 2013 to R112.0bn from December 2012. Specific credit impairments were increased to R48bn in June 2013 resulting in an increase in the ratio of specific impairments to impaired advanced by almost 200bps. Most of the increase in impaired advances was for smaller banks and not the five largest banks. This increased from R21.2bn in December 2012 to R23.4bn. However, the quality of the loan book has improved mainly because growth in impaired advances continued to be matched exceeded by growth in gross loans and advances in H1 13.

• With regards to unsecured lending, the Review noted that it has been growing at a slower pace since December 2012 (this has been corroborated by September’s private sector credit extension data). Total unsecured lending constituted 11.9% of total gross credit exposure and 27.1% of total retail credit exposure. The category witnessing the largest default exposures and specific credit impairments were less than or equal to R30 000 whereas exposures greater than R30 000 had the highest coverage ratio. The latter can probably be attributed to indications that loans in this category are a function of improved income levels and increased debt consolidation.

 

• While the banking sector’s gross credit exposure remained largely concentrated to South African counterparties, of interest is that there has been a meaningful increase to other African countries.

• Gross credit exposure to selected distressed European peripheral economies was less than 1% in June 2013 and mainly in the form of interbank derivative financial instrument exposures.