Financial Crime World

South African Banking Sector: A Stable yet Evolving Landscape

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Stability

The South African banking sector is characterized by strong profitability, good recurring fee income, and rigorous risk controls. This stability is evident in the following key metrics:

  • Return on equity (ROE) for top-tier banks averaged 16.6% in 2019.
  • ROE is expected to deteriorate sharply to an average of 10% in 2020 due to higher cost of risk and lower net interest margin.

Regulatory Environment

The South African Reserve Bank (SARB) plays a crucial role in maintaining stability within the sector. Key features of the regulatory environment include:

  • The SARB continues to support liquidity in the repo market, protecting the sector against external shocks through exchange controls limits.
  • The SARB’s independence is a key pillar for robust and transparent financial institutions.

Governance

Major banks in South Africa have adopted both IFRS (International Financial Reporting Standards) and Basel accords, increasing the depth and quality of account disclosure. Additionally:

  • Listing on the Johannesburg Stock Exchange (JSE) requires high levels of transparency as well as rigorous and timely disclosures.

Competitive Dynamics

The banking sector is characterized by an oligopolistic nature, creating high barriers to entry for new players. Key features include:

  • Five major banks account for over 90% of total system assets.
  • The entrance of digital banking solutions will accelerate cost optimization of large banks.

Risk Appetite

South African banks generally display strong and stable returns, resulting from good recurring fee income and generally good risk controls. Additionally:

  • Major banks have modest credit losses through a protracted weak economic environment, indicating proactive risk management and low risk appetite.

Systemwide Funding

The banking sector continues to derive funding predominantly from short-term deposits. Key features include:

  • The majority of this funding is short term (less than 12 months).
  • Exchange controls limit resident outflows to ZAR2 million per person or 25% of total liabilities for corporates, including banks.

Liquidity

The SARB’s liquidity support through the repo market has helped restore liquidity in the market after significant outflows triggered by EM sell-off in March 2020. Additionally:

  • Liquidity is expected to continue adjusting in the next few months due to new calibration of the WGBI and ongoing global economic crisis.

Conclusion

The South African banking sector appears stable, with strong profitability, good risk controls, and a supportive regulatory environment. However, there are potential risks, such as deteriorating ROE and ongoing liquidity adjustments, that will need to be monitored closely.