Watch that banana skins…

Tom Winterboer – partner at PwC, responsible for banking and capital markets – says that there is scope for new A2 banks to enter the market. Angelo Coppola reports…

The new A2 players could come from anywhere, and the asset managers, insurance companies and the like have been touted as potential sources, as they service a specific market sector.

“Sasfin and Capitec are the A2 players here, and it’s sad that the others are out of the system, when deposit insurance could have played a role. An option being touted is that of the savings and loans banks, but this is a long way off, with regulations only due to be written towards the end of the year.

Although Winterboer says that businesses like SA Home Loans and the furniture retailers could possibly looking at other offerings as they already have the customer base.

Business people are looking at the margins that the banks are making at the moment and are seriously considering getting in on the act, says Winterboer, who was presenting the international results of their survey.

Onto the international banking survey that PwC are involved in internationally and Winterboer reports that there were eight SA (local) respondents to the survey, among the 440 international responses, while many of the new respondents came from the emerging markets. SA is seen as part of the internationally developed financial services sector.

Titled the banana skins survey, the majority of input came from the UK, USA and Switzerland, because this is where the survey originated.

The main issues were too much regulation, credit risk, corporate governance, derivatives and finally hedge funds. Legal risk is starting to emerge as an issue. And it seems that respondents seem to be less prepared to handle the banana skins than they were in the last survey.

Added to which South African respondents also have to deal and commit management time and resources to adapting to the requirements of the Financial Services Charter.

Legal risk is hugely important. The blame culture is rising in the UK and USA. There have been successful legal cases concerning over-lending internationally. A problem that is not evident in South Africa.

On the banking side too much regulation did emerge as the main issue, while the non banking sector had other issues.

The local market is fairly developed locally and SA fits the profile of concerns raised. The banana skins concern around regulation.

Cost seems to be a major issue – This has become a head-on threat. FICA was a huge cost, and was echoed in the survey. Regulation here also included Basle II issues. On compliance risk, fines concerning FICA mean that it would be reputational risk, rather than the size of the fine that would be the main driver.

Flexibility of regulations is seen as non-existent, and this is seen as negative.

Competition means that the number of players is being reduced. “It’s keeping out new entrants and stifling innovation,” said several respondents. In SA there is huge concentration, and this is starting to happen in the UK. The FSA are seen as interfering with regulations and compliance are out of control.

In SA the regulatory focus could take the eye off the ball and customer service will suffer. Winterboer says that there must be regulations but banks are seen as pushing back.

Credit risk – loosing money the old fashioned way – credit is too keenly priced and there is shaky asset quality. Locally banks non-performing loans are in the best position they have been in for years. Credit quality in SA is better than their international compatriots.

On the question of corporate governance – still taken serious – but there are still scandals, and there is still a concern about weak assets. The size of the organization means that the ethics don’t necessarily filter down the ranks.

On derivatives, this dropped from number 1 to number 4 since the last survey. There are still players who don’t understand the asset class. The client doesn’t know what a derivative is, while the bank does.

On hedge funds – is this an accident waiting to happen, asks Winterboer It is still unregulated, while regulation was meant to be passed sometime this year. People are alarmed because of the alternative trading techniques and the aggressiveness, and migration into the retail sector.

According to Winterboer South African hedge fund investors invest R7bn locally and between $3bn and $4bn internationally. Hedge funds are being sold to high net worth individuals locally, but do they understand the risks?

On local hedge fund regulations Winterboer says: “You can set the speed limit and then monitor it, but you can’t prevent the accident.”

Currency issues relate to the disorderly devaluation of the US currency and the lack US government commitment to do anything and resolve the imbalances.

Merger mania is not really an issue at the moment. Basle II could lead to some consolidation. Locally the take over talk around Absa and Barclays is still in the air, while SA banks are attractive to overseas banks.

The local big banks (FirstRand, Standard Bank and Nedcor) and are concerned about international competition, and see this as raising the bar. Watch this space, says Winterboer.

“An international bank entering the local market doesn’t have the brand equity locally, and the foot print in terms of local branches is a necessity,” says Winterboer.