Reserves, profits and loans are on the rise but eurozone uncertainty is casting a pall over the future in South Africa, argues Lisa Steyn.

Credit Liquidity Basel

While the world watches anxiously as bankers in the eurozone sweat to prop up the ailing European financial system, South Africa’s banks are in remarkably good health and have become even more stable, profitable and well capitalised in the past year

This week the bank supervision department in the Reserve Bank released its annual report, which takes a comprehensive look at local banks.

The report shows that the operating profit of South Africa’s banks increased by 30% last year to R49-billion, whereas bad debts were reduced by R20-billion.

Although headlines often scream that South African households are over-indebted, the registrar of banks, Rene van Wyk, found that impaired advances decreased last year from 5.8% of the total to 4.7%.

It decreased from R138-billion in October 2010 to R118-billion in December last year.

During the same time, South Africa’s banks increased the loans they made by R210-billion, or 8.8%, to R2.5-trillion.

”[It’s] a well-managed banking system and the governance structures and management systems remain effective,” said Nkosana Mashiya, deputy registrar of banks.

As of March this year, the biggest growth was in term loans with an increase of R100-billion to R454-billion, year on year. Term loans include the fast-growing unsecured credit market in which loans are not secured by an asset such as a house or vehicle.

Although unsecured credit remains controversial, with fears the growing bubble will burst sooner or later, Van Wyk said “there are bigger fish to fry”. Rene Van Wyk Reserve Bank SA

He said the Reserve Bank was not concerned about unsecured lending and was not investigating it, but it would continue to monitor it and make sure banks understood the product carefully.

“The moral, social and reputational risks are high, more so than anything else,” he said.

But what does keep Van Wyk awake at night are fears of the eurozone crisis spreading beyond its borders.

“My only concern is what’s happening in Europe and what possible effect that can have on South Africa as a country. We can only speculate. Nobody knows for sure”, says Van Wyk.

Spain, the eurozone’s fourth-largest economy, has made its most explicit call to date for the European institutions to recapitalise its banks, the Financial Times reported on Wednesday.

On the same day, European Central Bank governor Mario Draghi left key rates unchanged at 1% despite pressure for lower interest rates to stimulate growth in the flagging eurozone.

The latest JP Morgan purchasing managers indexes for May showed that all major economies in the European Union are in decline, with its private sector economy withering at the fastest pace in nearly three years.

“Looking ahead, it is essential for banks to continue to strengthen their resilience further,” he said. “The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of all funding channels.”

The situation is in stark contrast to the sound bill of health given to South Africa’s banks. “Improved quality of loan books has led to a reduced amount banks have to provide for impairments,” said deputy registrar Madoda Petros.

Regarding liquidity, Mashiya said South Africa’s banks had always held more than required, but even that margin has increased since 2009. Figures for March showed banks held almost double the required liquidity. And they have made good preparation for perhaps the toughest requirement South Africa will have to adhere to in terms of Basel III financial regulations.

Courtesy: Mail and Guardian Online – Reported by Lisa Steyn