Pretoria - The South African banking sector remained stable in the six months to end-June and is well placed to withstand vulnerabilities and future adverse shocks, the South African Reserve Bank (Sarb) said on Thursday in its September 2011 Financial Stability Review (FSR).
The FSR document focuses mainly on economic and financial sector developments for the six-month period ended June with selected developments, such as the sell-off in emerging market economies' (EMEs) assets in September.
High concentration
"The sector remains highly concentrated compared to other countries," the FSR said. The market share of the top four banks (Absa Group [JSE:ASA], First National Bank, Nedbank Group [JSE:NED] and Standard Bank Group [JSE:SBK]) rose to 84.49% in June from 83.4% in September 2010.
Banking shares were volatile in the period under review, while the sector's capital adequacy ratio of 14.98% at the end of June exceeded the regulatory Tier 1 capital to risk-weighted asset ratio of 12.02%.
The level of impaired advances appeared to have peaked at R138bn in October 2010 at 5.95% of gross advances and eased to R131bn or 5.55% in June.
The high ratio of operating expenses to gross income remained a challenge for banks during the period and remained well above its recent average, although there was a marginal improvement in the second quarter.
The improvement is due to cost-cutting as banks retrenched "excess" personnel and closed non-profitable branches such as that in Wakkerstroom, the oldest town in Mpumalanga.
The ratio of operating expenses to gross income remained in excess of 50% and amounted to 56.8% in June from 56.9% in March and 56.4% in December.
Gross loans and advances were R2.362 trillion at the end of June compared with R2.313 trillion at the end of July 2010.
The newly computed banking stability index suggested stability in the past 18 months despite a volatile external environment.
The Sarb said the ultimate objective of economic policy is to create a sustainable level of economic growth through investment, employment and production. This is best achieved when contributions are made from all sectors in the economy.
Historically the financial sector has made substantial contributions to the level of economic growth. The responsibility for ensuring healthy contributions from this sector towards sustainable economic growth is generally split between three parties.
Firstly, government's responsibility is to create a stable environment and infrastructure of legal rules and practice and timely, accurate information, supported by regulatory and supervisory arrangements that help ensure constructive incentives for financial market participants. Success will promote growth and stabilise the economy on a higher growth path.
Secondly, the central bank is responsible for contributing towards the achievement and maintenance of a stable financial system.
Thirdly, the environment and conditions created by the government and the central bank will enable the private sector to create economic growth through investment, employment and physical production.
For many years, central banks have focused primarily on their monetary policy (price stability) objective. However, the recession that began in 2007 has seen a rethink, with an increased emphasis on financial stability.
The increasing interdependence of economies and interconnectedness of the global financial system has led to significant financial stability initiatives. These structured initiatives have developed standards that are material to the strengthening of the global financial system.
The cost of the recent financial crisis has been significant. According to the International Monetary Fund, direct costs of banking crises in the past 15 years exceeded 10% of the gross domestic product in more than a dozen cases.