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South African banks brace for a slow recovery

28 August 2009 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

The global financial meltdown created a smokescreen for South African banks. Analysts measured the health of the domestic banking system against peers in the US and European market, so it came as no surprise when they dismissed out of hand any sub-prime t

It’s also a good time to consider the business approach these institutions will adopt in the coming 18 to 24 months. To find the answers to some of these questions we attended an Ernst & Young media briefing titled Opportunities for Banks in the Crisis, held at the group’s Wanderers head office on 26 August 2009. Lead banking and capital markets director, Emilio Pera, shared some of the findings from a recent survey of the domestic banking industry.

Banks’ laager mentality impacts on South Africa Inc

The most common terms applied to the global financial crisis include ‘sub-prime’ and ‘credit crunch’. It’s the latter term that best describes the crisis of liquidity that practically wiped out the global financial system. Credit simply dried up as banks realised their loan books weren’t adequately secured by underlying assets. The inter bank lending rates in developed economies went through the roof as individual institutions hunkered down to survive the storm. “South African banks have most definitely felt the impact of higher capital costs, and restricted capital availability,” said Pera. As the magnitude of the international crisis became clearer, South African banks quickly realised that their own lending practices might come back to haunt them. Most local institutions were particularly reckless through the housing market boom that began in 2002 and petered out late in 2006.

In the immediate aftermath of the credit crunch local banks became extremely cautious about extending further credit, and although liquidity has since recovered, banks remain cautious for a number of reasons. These include the looming recession, rising unemployment and a healthy respect for the provisions of the National Credit Act. The Act “compels banks to ensure that consumer affordability is adhered to before lending,” said Pera. The extent of the slowdown in credit activity caught everyone by surprise, with many lobbyists suggesting the banks are responsible for stalling the country’s economic recovery.

The South African Reserve Bank DI 900 data to 31 July 2009 confirms the lobbyists’ worst fears – credit growth is contracting in three of the four major product categories. Measures of growth for credit cards, loans & advances and instalment finance all dipped below zero in the latest period. And mortgage growth, although still positive, has been in decline since late 2006! While softer credit extension numbers hurt the economy they wreak havoc on the bottom line of individual banking groups. The ‘big four’ banks estimate combined losses on their mortgage portfolios in excess of R2bn in the first six months of FY 2009. Pera noted that “credit impairments had whittled away bottom line profits – predominantly in the retail segment – but in the corporate market too!” Vehicle finance is also proving problematic, further impacting bottom line profits.

Amazing recovery in net asset values

A picture paints a thousand words. One of the best illustrations of South African bank resilience is a comparison of net asset values across a variety of banks and geographies. The market capitalisations of South Africa’s ‘big four’ (with the exception of FNB’s holding company, FirstRand) have improved with leaps and bounds since February 2009, almost reaching levels recorded in August 2008. Standard Bank is actually worth more at 8-August-2009 than a year previously. FirstRand – which is heavily dependent on its mortgage book for earnings – lags its peers. Analysts suggest the company could surprise on the downside when it reports results for the current half-year. European banks like Deutsche Bank and Barclays have clawed back most of their lost value too. In stark contrast, banks in the US (Citigroup) and a basket of African banks (First bank of Nigeria, Intercontinental Bank of Nigeria and Diamond Bank Nigeria) remain near their February 2009 levels.

Light at the end of the tunnel

The strength of the local banking sector is aptly demonstrated by the fact most of our banks remained profitable through the crisis. Earnings might have fallen between 25% and 35% for the first six months of FY2009, but at least we haven’t seen the massive losses posted by major international banks in the US and Euro-zone. Locally, credit impairments remain a major concern. Under these circumstances its not surprising that credit supply is still in decline. The good news is default levels appear to have peaked and most banks believe they have been through the worst. “There are some indications that banks are starting to extend credit again, certainly more so than we have seen in the past 18 months,” said Pera.

South Africa’s major banks are “not out of the woods, but definitely moving out of the ‘stressed’ space,” said Pera. Over the next year banks will change tack from asset protection strategies in a stressed environment to surviving recession through improved performance effectiveness.

Editor’s thoughts:
As we paged through the Ernst & Young banking presentation we were struck by a slide documenting the declining profitability of the banks’ mortgage portfolios. Credit losses are hurting profitability, making banks reluctant to commit to further mortgage advances. In reality the banks are punishing prospective clients for their own mistakes. Should banks shoulder the blame for the current raft of home loan defaults? Add your comments below, or send them to gareth@fanews.co.za

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