Banking Industry

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1 SOUTH AFRICAN BANKING SECTOR OVERVIEW

Transcript of Banking Industry

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SOUTH AFRICAN BANKING SECTOR OVERVIEW

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TABLE OF CONTENTS

Sections Page

1 Background 1 2. Financial services sector’s contribution to the economy 2 3. Total Assets 2 4. Total liabilities 4 5. Profitability 5 6. Shareholding structure 5 7. Branches ,ATMs, POS 6 8. Usage of payment systems 6 9. Employment 8 10. Number of customers 8 11. Repo and Prime rate movements 8 12. Regulation 9 13. The Financial Sector Charter 10 14. Conclusion 11

Figures

1. Number of banks in SA 2 2. Total banking sector assets 3 3. Loans and advances (September 2011) 3 4. Market share of major four banks 4 5. Total liabilities of the banking sector 4 6. Composition of deposits 5 7. Shareholding in the banking sector 6

Tables

1. List of banks in SA 1 2. Number of ATMs, branches and POS 6 3. Usage of payment systems 7 4 Employment profile of banking sector (2009) 8 5. Repo and Prime rate movements (2005 to 2010) 9

Enquiries: Nwabisa Matoti ([email protected])

Last updated: November 2011

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SOUTH AFRICAN BANKING SECTOR OVERVIEW

1. Background

South Africa has a developed and well regulated banking system which compares favourably

with those of industrialised countries. The sector has undergone a lot of changes in the past

20 years, with the early 1990s being characterised by a process of consolidation resulting

from mergers of a number of banks including Allied, Volkskas and United to form ABSA and

the proposed merger between Nedcor and Stanbic which failed eventually.

The promulgation of the Banks Act of 1990 led to a number of banking licenses being issued

and by the end of 2001 there were 43 registered banks in South Africa. The announcement of

Saambou’s financial troubles in 2002, however, resulted in a run on BOE and other smaller

banks which led to a number of banks not renewing their banking licenses and others seeking

financial assistance from foreign shareholders. Other banks such as Regal Bank also

experienced financial difficulties during that period and were placed under curatorship.

Although the South African banking sector has been through a process of volatility and change

in the past, it has attracted a lot of interest from abroad with a number of foreign banks

establishing presence in the country and others acquiring stakes in major banks, for example,

the Barclays – ABSA and Industrial and Commercial Bank of China – Standard Bank deals.

There have been a number of changes in respect of the regulatory environment, product

offerings, and number of participants resulting in a greater level of competition on the market

from smaller banks such as Capitec bank and African Bank, which have targeted the low-

income and the previously unbanked market.

The SA banking industry is currently made up of 17 registered banks, 2 mutual banks, 12 local

branches of foreign banks, and 41 foreign banks with approved local representative offices.

The banks are listed in Table 1 below.

1.1 Table 1- List of banks in SA

Category Bank

Registered banks –

locally controlled

ABSA Bank Limited; African Bank Limited; Bidvest Bank Limited; Capitec Bank Limited; FirstRand Bank Limited; Grindrod Bank Limited; Investec Bank Limited; Nedbank Limited; Regal Treasury Private Bank Limited (In liquidation); Sasfin Bank Limited; Ubank Limited; The Standard Bank of South Africa Limited.

Registered banks –foreign controlled

Albaraka Bank Limited; Habib Overseas Bank Limited; HBZ Bank Limited; Islamic Bank Limited (In Final Liquidation); Mercantile Bank Limited; The South African Bank of Athens Limited.

Mutual banks GBS Mutual Bank; VBS Mutual Bank Local branches of foreign banks

Bank of Baroda; Bank Of China Limited Johannesburg Branch (trading as Bank Of China Johannesburg Branch); Bank of Taiwan South Africa Branch; China Construction Bank Corporation - Johannesburg Branch; Citibank N.A.; Deutsche Bank AG; JPMorgan Chase Bank N.A. (Johannesburg Branch); Société Générale; Standard Chartered Bank - Johannesburg Branch; State Bank of India; The Hongkong and Shanghai Banking Corporation.

Foreign banks with approved local representative offices

AfrAsia Bank Limited; Banco BPI, SA; Banco Espirito Santo e Comercial de Lisboa; Banco Privado Português, S.A.; Banco Santander Totta S.A.; Bank Leumi Le-Israel BM; Bank of Cyprus Group; Bank of India; Barclays Bank Plc; Barclays Private Clients International Limited; BNP Paribas Johannesburg; Commerzbank AG Johannesburg; Credit Suisse AG; Credit Suisse Securities (Europe) Limited; Ecobank; Export-Import Bank of India; Fairbairn Private Bank (Isle of Man) Limited; Fairbairn Private Bank (Jersey) Limited; First Bank of

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Nigeria; Fortis Bank (Nederland) N.V.; Hellenic Bank Public Company Limited; HSBC Bank International Limited; Icici Bank Limited; KfW Ipex-Bank GmbH; Lloyds TSB Offshore Limited; Millenium BCP; National Bank of Egypt; NATIXIS Southern Africa Representative Office; Royal Bank of Scotland International Limited; Société Générale Representative Office for Southern Africa; Sumitomo Mitsui Banking Corporation; The Bank of New York Mellon; The Bank of Tokyo-Mitsubishi UFJ, Ltd; The Mauritius Commercial Bank Limited; The Rep. Off. for Southern and Eastern Africa of The Export-Import Bank of China; UBS AG; Unicredit Bank AG; Union Bank of Nigeria Plc; Vnesheconombank,; Wells Fargo Bank, National Association; Zenith Bank Plc

Source: SA Reserve Bank

1.2 Figure 1 - Number of banks in SA

41

30

22 20 19 19 19 19 1817

15 14 15 15 15 14 14 14 13 13

5652

44 43 47 43 46 43 42 41

0

10

20

30

40

50

60

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Number

Number of banks in SA

Registered banks Banks Mutual banks Branches of international banks Representative offices

2. Financial services sector’s contribution to the economy

The financial services sector contributes about 10,5 percent to gross domestic product (GDP),

with assets to the value of over R6 trillion. Taxes amount to over 15 percent of GDP, whilst

employment represents about 4 percent. The banking sector assets represent just over 50

percent of total financial services sector assets.

3. Total Assets

The assets of the banking sector improved to a level of R3,4 trillion after some moderate

increases between December 2008 and June 2011 (Figure 2). There was a 9 percent

increase in the total value of assets during the quarter ended September 2011.

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3.1 Figure 2 – Total banking sector assets

Figure 3 below depicts the composition of loans and advances as at end September 2011.

Home loans represented the largest component at 34 percent, followed by term loans at 16

percent.

3.2 Figure 3 – Loans and advances (September 2011)

34%

10%

2%10%

5%

16%

23%

Composition of loans and advances (Sep 2011)

Homeloans Commercial mortgagesCredit cards Lease and instalment debtorsOverdrafts Term loansOther

Source: SA Reserve Bank

Figure 4 below illustrates the market share of the four major banks as at end September

2011. The four major banks represented about 84 percent of total banking assets. Standard

Bank, the largest bank in terms of assets, had a market share of 31 percent, followed by

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ABSA with 25 percent. FirstRand and Nedbank had a market share of about 24 percent and

20 percent respectively.

3.3 Figure 4 – Market share of the major four banks (Sep 2011)

Source: SA Reserve Bank

4. Total liabilities

After a sharp decline in the first quarter of 2011, total liabilities of the banking sector

increased by 3 percent between the second and third quarters of 2011 reaching a level of

about R2,6 trillion (Figure 5).

4.1 Figure 5 – Total liabilities of the banking sector

2 7682 996 2 964

2 834 2 809 2 769 2 821 2 8012 904

2 8482 885

3 131

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

0

500

1 000

1 500

2 000

2 500

3 000

3 500

Sep2008

Dec2008

Mar2009

Jun2009

Sep2009

Dec2009

Mar2010

Jun2010

Dec2010

Mar2011

Jun2011

Sep2011

R'bn Percent

Total liabilities

Liabilities (LHS) Growth (RHS)

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Deposits represented about 77 percent of total liabilities at the end of September 2011. The

composition of deposits is illustrated in Figure 6 below. Fixed and notice deposits constituted

the largest part at 32 percent, followed by current and call deposits both at 17 percent.

4.2 Figure 6 – Composition of deposits

17%

5%

17%

32%

15%

4%

10%

Composition of deposits (Sep 2011)

Current Savings Call Fixed and notice NCDs Repos Other

Source: SA Reserve Bank

5. Profitability

The Return on Equity (RoE) and the Return on Assets (RoA) for the banking sector improved

to 15,9 percent and 1,12 percent respectively in September 2011 (September 2010: 15,2

percent and 0,99 percent respectively). The efficiency of the banking sector, however,

deteriorated as the cost-to-income ratio increased from 54,6 percent in September 2010 to

55,9 percent in September 2011. Operating expenses increased from R83,8 billion in

September 2010 to R93,1 billion in September 2011.

6. Shareholding in the banking sector

By end of December 2010, shareholding by foreigners in the sector represented about 43

percent of total nominal banking shares in issue, whilst domestic and minority (those with a

shareholding less than 1 percent) represented about 27 percent and 30 percent respectively

(Figure 7). The large portion of foreign shareholding can be mainly attributed to the large

stake that Barclays Plc has in ABSA.

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6.1 Figure 7 – Shareholding in the banking sector

7. Branches, ATMs, and Points of Sale

By the end of December 2010, the total number of ATMs and branches of banks stood at 26

439 and when points of sale were included, this number increased to (179 319) (Table 2).

7.1 Table 2 – Number of ATMs, branches and points of sale (Dec 2010)

Category Value

Number of branches (major four banks) 2 927

Number of branches (all banks*) 6 303

Number of ATMs, branches (major four banks) 26 439

Number of ATMs, branches, POS (major four

banks) 175 839

Number of ATMs, branches, POS (All banks) 179 319

* Major four banks, African Bank, Capitec, Ithala,Ubank, and SAPO.

8. Usage of payment systems

The usage of payment systems for the period 2005 to the first half of 2010 is illustrated in

Table 3 below. These statistics, however, only represent domestic transactions. There

appears to be a common trend in the figures listed below – slow rate of transaction growth in

all categories from 2007. This could also be possibly due to changes in economic conditions

which negatively affected the consumer (lower disposable income, higher levels of

indebtedness therefore changed spending patterns).

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8.1 Table 3 – Usage of payment system

Source: Payment Association SA (PASA)

ATM Transactions

Period Volume

%

Change Value (Rands)

%

Change

2005 166 891 507 6.1% 40 554 418 390 8.4%

2006 192 734 194 15.5% 47 463 298 261 17.0%

2007 234 322 151 21.6% 59 058 301 908 24.4%

2008 268 438 678 14.6% 71 370 586 351 20.8%

2009 276 211 771 2.9%

77 182 864 413 8.1%

June 2010 145 189 138 42 126 129 369

Credit Card Clearing & Settlement (POS) Transactions

Period Volume

%

Change Value (Rands)

%

Change

2005 121 392 698* - 41 792 537 747*

-

2006 257 008 611 - 93 223 327 767

-

2007 278 539 563 8.4% 105 372 094 855 13.0%

2008 265 480 842 -4.7% 108 087 430 784 2.6%

2009 260 834 540 -1.8% 109 262 373 476 1.1%

June 2010 146 727 622 64 470 320 277

Debit Card (POS) Transactions

Period Volume

%

Change Value (Rands)

%

Change

2005 68 769 674 77.0% 15 319 086 087 97.6%

2006 112 274 366 63.3% 26 982 144 785 76.1%

2007 147 800 549 31.6% 36 491 074 579 35.2%

2008 193 637 674 31.0% 48 744 246 683 33.6%

2009 225 855 348 16.6% 56 877 976 287 16.7%

June 2010 128 822 461 32 488 456 325

EFT Total Transactions

Period Volume

%

Change Value (Rands)

%

Change

2005 515 535 477 9.6% 2 925 646 354 523 16.6%

2006 572 166 154 11.0% 3 520 882 895 027 20.3%

2007 627 449 606 9.7% 4 142 740 609 760 17.7%

2008 663 052 101 5.7% 4 872 121 613 920 17.6%

2009 698 078 054 5.3% 4 896 464 564 124 0.5%

June 2010 357 831 347 2 548 728 819 900

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9. Employment

According to the Labour Force Survey (third quarter of 2011), the financial services industry

was the third largest employer in the country, representing about 13,3 percent of total

employment. By the end of December 2010, there were just over 155 000 people employed

in the banking sector. The major four banks represented about 82 percent of this amount

Table 4 depicts the employment figures by some of the banks operating in SA.

9.1 Table 4 – Employment profile of banking sector (2010)

Bank Number of employees

ABSA 38 000

Standard Bank 30 000

FirstRand Bank 32 000

Nedbank 28 000

Investec Bank 3 700

Citibank N.A. 300

African Bank 15 000

Duetsche Bank 200

JP Morgan Chase 500

Standard Chartered Bank 230

Societe Generale 51

Capitec Bank 5 331

China Construction Bank 50

Mercantile Bank 430

Bank of China 56

State Bank of India 45

Bidvest Bank 1058

Sasfin 560

The SA Bank of Athens 170

Total 155 681

Source: PWC Banking Survey 2011

10. Number of retail accounts

According to the PriceWaterhouseCoopers (PWC) 2011 SA Banking Survey, the number of

retail accounts by the major four banks amounted to 34,5 million in 2010 and this number is

expected to increase to 40 million accounts by 2014.

11. Repo and Prime rate movements

Table 5 below illustrates changes in the SA Reserve Bank repo rate and the prime rate

charged by banks. The difference between the two rates is 3,5 percentage points. The SA

Reserve Bank increased its repo rate 9 times between June 2006 and June 2008 due to the

economic developments at the time, resulting in the subsequent increase in the prime rate

which had huge impact on the disposable income. However, interest rates started to decline

from December 2008 as conditions improved.

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11.1 Table 5 – Repo and Prime rate movements (2005 to 2010)

12. Regulation

The South African banking sector is heavily regulated to ensure proper oversight over its

operations. Legislation that affects the banking industry includes, amongst others:

• The Banks Act ;

• The National Payment System Act ;

• The Financial Intelligence Centre Act (FICA);

• The Financial Intermediary and Advisory Services Act (FAIS);

• The National Credit Act;

• The Consumer Protection Act;

• The Home Loan and Mortgage Disclosure Act; and

• The Competition Act.

Further, banks have to comply with the King Code on Corporate Governance and Basel II

(except for the 2 mutual banks). There are also various ombudsmen tasked with achieving

quick and effective dispute resolution for banks and their customers in a fair, impartial and

confidential manner.

In the aftermath of the 2008 global financial crisis, various strategies have been announced by

international standard-setting bodies to address the fundamental weaknesses revealed by the

crisis. These include the new amendments to the regulatory framework (Basel III) where

banks will be required to hold more capital of higher quality and have enough liquid assets to

Date Repo (%) Prime (%)

2005/04/14 7 10.5

2006/06/08 7.5 11

2006/08/03 8 11.5

2006/10/13 8.5 12

2006/12/08 9 12.5

2007/06/08 9.5 13

2007/08/17 10 13.5

2007/10/12 10.5 14

2007/12/07 11 14.5

2008/04/11 11.5 15

2008/06/13 12 15.5

2008/12/12 11.5 15

2009/02/06 10.5 14

2009/03/25 9.5 13

2009/05/04 8.5 12

2009/05/29 7.5 11

2009/08/14 7 10.5

2010/03/26 6.5 10

2010/09/10 6 9.5

2010/11/19 5.5 9

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cover outflow of funds. South Africa, a member of G20, has to comply with the new

amendments. Further, the National Treasury has proposed a twin-peaks regulatory system,

which proposes a macroprudential approach to banking supervision, to ensure a safer financial

sector.

13. The Financial Sector Charter

The Financial Sector Charter (FSC), a transformation charter in terms of the Broad-based

Black Economic Empowerment (BBBEE) Act, was signed in 2003 for implementation in 2004.

The participants (financial institutions) committed to 'actively promoting a transformed,

vibrant, and globally competitive financial sector that reflects the demographics of South

Africa, and contributing to the establishment of an equitable society by effectively providing

accessible financial services to black people and by directing investment into targeted sectors

of the economy'. They committed to transforming the sector in the areas of:

• Human resource development;

• Procurement of goods and services;

• Access to financial services;

• Empowerment financing (including targeted investments in transformational

infrastructure, low-income housing, agricultural development and black SMEs as well as

BEE transaction financing);

• Ownership and control; and

• Corporate social investment (CSI).

Targets for the first 5-year period were set and by the end of 2008 the following had been

achieved by the banking sector:

Achievements 2004 – 2010:

• Access to housing finance - about R65 billion;

• SME finance - about R16 billion;

• Agricultural finance - just over R3 billion;

• Transformational infrastructure - about R12 billion;

• Mzansi accounts totalled 4,6 million (with a 30 percent dormancy rate);

• Access of LSM 1-5 to bank branches within a 15km radius was 74,4 percent;

• Access to branches and ATMs within 10km radius was 79,2 percent. (FSC target 80

percent of LSM1-5)

The FSC gazetting (as a Sector Code) has not yet been finalised, so financial institutions are

currently reporting under BBBEE Codes of Good Practice.

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14. Conclusion

The South African banking system has been through some dramatic changes in the past two

decades. It is, however, very well developed and comparable to those of industrialised

countries. It is generally viewed as world class, with adequate capital resources, technology

and infrastructure and a strong regulatory and supervisory environment. This strong

regulatory system saved the sector from the global financial crisis that started about three

years ago which resulted in bank bailouts in a number of countries. Further, the SA banks’

risk management systems are fairly robust as a result of the early implementation of Basel II.

The country, however, went through an economic recession in 2009 which affected consumer

affordability (and therefore spending patterns), resulting in them being more reluctant to take

on more debt. This resulted in the increase in non-performing loans which had a huge impact

on the banks’ loan books. The total assets and liabilities declined in 2009 but have started to

pick up as the country is moving out of recession. Banks also started to apply stricter lending

measures as a result of the implementation of the National Credit Act in 2007.

South Africa has a large unbanked population which stood at about 15 million (about 52

percent of the adult population) in 2004. The banking sector has taken some great strides in

banking the previously unbanked through the implementation of the FSC in 2004 as about 36

percent of the adult population now remain unbanked1. The implementation of the FSC

resulted in an increase in product offerings, with smaller banks emerging as major players and

creating some competition in catering for the needs of this market through entry-level

banking. Further, through the implementation of the FSC, transformation in the sector has

now been institutionalised.

1 Finscope 2009.

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