The banking sector has to meet challenges head on

Gareth Stokes, FAnews Online Editor

In 2006 the Competitions Commission launched an investigation into bank charges. Their voluminous findings were distributed widely and critically received by the media and consumer rights bodies. Little has changed since – that is – until comments in Fina

Predicting the financial services collapse

Previous Banking Banana Skins reports contain insightful predictive comment that largely went unnoticed. In 2006, CSFI director Andrew Hilton asked: “Where is the next banking crisis coming from?” He was confident another hiccup was just around the corner... Two years later a senior US banker commented: “Consumers are in worse shape than most observers appreciate and will keep increasing their debt load until they can literally borrow no more.” We know today that the unprecedented hunger for profit among bankers – and consumers’ willingness to borrow – resulted in a financial system meltdown the extent of which had not been witnessed for decades. But we’re more concerned with the issues confronting banks as they emerge from the crisis.

Tom Winterboer, SA Financial Services and Banking Leader at PricewatherhouseCoopers, presented some of the findings of the latest CSFI survey of bank risk at a media function in Johannesburg recently. The survey was carried out between November and December 2009 among 443 respondents from 49 countries. The bulk of respondents (62%) were bankers, with observers (32%) and regulators (6%) making up the balance. The survey included comment from six South African respondents. Respondents were asked to describe their main concerns for the financial system over two to three years.

First prize for political interference

The big newcomer to the list of banking industry concerns is political interference. This shot up from nowhere to occupy the top slot in 2010. Bankers are wary of the extent to which governments now own assets in the financial services environment, particularly in the developed economies such as the UK, most of the Euro-zone and the US. “The concern is that the global financial crisis has taken the banking industry’s future out of its own hands,” said Winterboer. “Governments’ efforts to rescue banks from disaster have staved off a collapse of the system, but have left attitudes towards the banking industry deeply politicised,” he added. Moral hazard aside, the industry questions how governments will withdraw its financial support from the industry.

‘Too much regulation’ crept up from eighth place in 2008 to occupy the third slot. Bankers believe regulators will overreact to the financial crisis and implement policies that could prove damaging to ongoing banking business. Capital availability jumped into sixth place, as a result of the imbalance between demand for capital and its availability. Other top concerns include credit risk (2), macro-economic trends (4), liquidity (5) and derivatives (7).

Turning to South Africa

South African banks are less concerned with political interference than their developed world counterparts. However, comments in Finance Minister Pravin Gordhan’s recent budget speech suggest government is ready to get tougher on certain aspects of the local industry, particularly bank fees. There is also renewed pressure for the industry to finalise the stalled Financial Sector Charter.

The biggest concern for emerging market banks is credit risk – or rather the risk of credit default. Statistics SA’s December 2009 report confirmed an alarming increase in liquidations in South Africa through 2009, up 25% on the previous year. The number of insolvencies in November 2009 was 12.6% up on the same month in 2008 too. Household debt remains high and the banks have all reported massive impairments. “Non-performing loans have peaked, but a big proportion of doubtful debt is in debt counselling,” said Winterboer. Statistics from the National Credit Regulator paint a dismal picture. At 30 September 2009 only 41.2% of the country’s consumers enjoyed good credit standing. 13.3% of consumers were in judgment or under administration, 14.7% struggling with adverse listings and 17% more than three months in arrears.

Macro economic trends impact heavily on the domestic financial services industry. Emerging market banks rank these trends as high as three on their list of concerns for the next three years. South Africa’s continued battle with consumer price inflation and unemployment feature strongly in this category. “Official unemployment topped 24.3% in Q4 2009 and remains one of the country’s biggest challenges,” said Winterboer.

On double-dip recession

The survey concludes that stakeholders in the banking industry are more pessimistic than in previous years. Globally, only 9% (24% in 2008) of respondents believed that banks were well prepared to handle the identified risks. The only positive is that some of the more serious risks, including liquidity, derivatives and equities, are down on the previous year.

Editor’s thoughts: South Africa was fortunate to avoid the bulk of the global financial contagion. Unlike its developed market peers, our government wasn’t called upon to provide rescue funds for the banking sector. But local banks have their own problems, most notably the impairment position on their consumer loan books. Have we seen the worst of credit impairments at our big four banks? Add your comments below, or send them to gareth@fanews.co.za