South Africa Commercial Banking Report

Key Issues

The South African commercial banking sector has been growing rapidly. This is partly because of the strength of domestic demand, which is expected to remain robust. Notwithstanding the fact that the weakness of the ZAR and rising interest rates will probably, at some point, have an impact, the general environment remains favourable for the commercial banks.

Aside from their holdings of bonds, most aspects of the commercial banks' balance sheets have been growing strongly. Loans have been growing significantly faster than assets, deposits or nominal GDP. The result of this is that the loan/asset, loan/deposit and loan/GDP ratios have all risen over the last year or so even though, by most standards, they were already at fairly high levels.

Nevertheless, it is possible to identify several challenges. One is that, at a time of soaring profits, the commercial banks are receiving the attention of South Africa's competition regulator. The other is that competition from foreign banks is increasing. In late 2005, UK group Barclays purchased a controlling stake in Absa, the second-largest bank in terms of assets, in a transaction that was the largest single foreign direct investment (FDI) in South Africa's history. It remains to be seen what will be the ultimate result of the combination of Barclays' brand and financial muscle with Absa's distribution network. More recently, several foreign groups have looked at niche opportunities. Australia's Macquarie Bank has teamed up with black empowerment investor J&J to set up an investment bank in South Africa. An offshoot of Richard Branson's Virgin empire is launching a 'no-frills' credit card.

Changes To This Quarter's Commercial Banking Forecast

We have made a number of improvements to the commercial banking reports this quarter. In particular, we have collated information about banks' capital and bond portfolios.

We have looked at capital primarily because we wanted to produce a clearer picture of the banks' balance sheets and, in particular, the liabilities side. We are now much better able to quantify liabilities that are not deposits.

We collated information about the bond portfolios because we wanted to gain additional insights about the risks with which the banks are involved. Across all the countries that we have surveyed, the commercial banks are major investors in government securities. In some instances, the banks are large holders of bonds - by any standard. In other instances, the banks' holdings of securities represent a very substantial portion of their total assets.