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Banks pile up capital as lending slows up
November 4, 2009
By Ethel Hazelhurst
Domestic banks are suffering from slower growth in loans and rising bad debts but their capital ratios are sound, according to the Reserve Bank's Financial Stability Review (FSR).
The ratio of capital to banks' risk-weighted asset profile rose from 13.01 percent to 13.69 percent between January and June - the period under review. The minimum regulatory requirement in South Africa is 9.5 percent and the international minimum benchmark is 8 percent.
In many countries banks were forced to turn to governments for capital during the global financial crisis because they would have been unable to stay in business otherwise.
The local industry remained sound but is under pressure as three consecutive quarters of recession put a squeeze on both the corporate and household sectors.
Impaired advances rose 37.5 percent to R .9 billion between December last year and June, the FSR said. The ratio of impaired advances to total loans and advances rose from 4.19 percent to 5.53 percent from January to June.
The rising ratio added to the cost of banking business and helped push the ratio of operating expenses to gross income from 49 percent to 49.35 percent.
Describing the cost-to-income ratio as "fairly low", the FSR said: "The weakening asset quality of banks is not seen as posing a major systemic threat as banks have maintained high levels of capital and continue to be profitable albeit less so than before."
Return on assets fell to 0.99 percent in June from 1.15 percent in January; and return on equity to 17.54 percent from 20.70 percent in the period. Both figures are on a smoothed basis.
Other factors that affected banking profits were narrower interest rate margins and the reduction in the value of banks' investment portfolios.
However, investors regained their appetite for banking stocks and prices rose 7.79 percent year on year in June after falling 14.84 percent in January.
In the period under review, the market share of the big four banks rose from 84.11 percent in January to 84.79 percent in June - probably because they are seen as too big to fail in the event of a financial crisis.
Governments invariably provide support in these circumstances because the impact of a big bank failure would be disastrous for the economy.
Banks' lending policies in the period had implications for the broader economy. The FSR said the reluctance of banks - particularly retail banks - to lend reinforced "acute pro cyclical behaviour". In other words, the shortage of credit forced households to cut back on spending and reduced investment by businesses.
However, "in the case of investment banking type activities, fewer banks maintained their strict lending criteria in the second quarter, probably in anticipation of increased demand for credit from corporations", the FSR said.
Lending to households rose to 38 percent of banks' business in June up from 36.47 percent in December last year.
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