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Press release by the Registrar of Banks on the Annual Report 2008 of the Bank Supervision Department 2 July 2009
Contents of the Annual Report 2008
1. Chapter 1
The topics reviewed in this chapter include, inter alia, the following:
1.1. Overview of trends in the South African banking sector
Notwithstanding the turmoil experienced in international financial markets and the domestic cyclical economic developments during 2008, the South African banking system again remained stable, and banks were adequately capitalised and profitable. The banking sector’s capital-adequacy ratio increased from 11,8 per cent in January 2008 to 13,0 per cent at the end of December 2008. The tier 1 capital-adequacy ratio increased from 8,9 per cent at the end of January 2008 to 10,2 per cent at the end of December 2008.
Total banking-sector assets increased from R2 663 billion in January 2008 to R3 170 billion at the end of December 2008. The year-on-year growth rate at the end of December 2008 was 24,5 per cent (January 2008: 27,0 per cent). Total assets of the four largest banks, amounting to R2 676 billion, accounted for 84,4 per cent of total banking-sector assets.
Gross loans and advances increased from R2 103 billion in January 2008 to R2 316 billion at the end of December 2008. Growth in gross loans and advances (measured year-on-year) eased to 9 per cent at the end of December 2008, compared to 19,2 per cent at the end of January 2008.
Banking-sector total liabilities amounted to R2 989 billion at the end of December 2008 (January 2008: R2 509 billion) and total equity amounted to R181 billion (January 2008: R154,4 billion). Deposits represented 79,6 per cent of total liabilities and the main contributors thereto were fixed and notice deposits (25 per cent), call deposits (22,1 per cent) and negotiable certificates of deposits (16,3 per cent). Deposits from retail and corporate customers remained the primary sources of funding and represented 63,2 percent of total banking sector deposits at the end of December 2008.
Banks remained profitable throughout 2008, despite the turmoil experienced in international financial markets and the domestic cyclical economic developments. The banking sector’s cost-to-income ratio (unsmoothed) amounted to 42,2 per cent at the end of December 2008 (January 2008: 47 per cent). Return on equity (unsmoothed) amounted to 28,7 per cent (January 2008: 24,1 per cent) and return on assets (unsmoothed) amounted to 1,62 per cent (January 2008: 1,39 per cent).
Liquid assets held by banks exceeded the statutory liquid assets requirement throughout 2008. The liquid assets held, measured against the minimum liquid asset requirement, amounted to 115,5 per cent at the end of December 2008 (January 2008: 111,1 per cent).
The increase in interest rates, other cyclical economic developments in South Africa and the turmoil experienced in international financial markets contributed to credit risk ratios deteriorating during 2008. Impaired advances increased to R87,3 billion at the end of December 2008 (January 2008: R47,6 billion). Impaired advances as a percentage of gross loans and advances deteriorated from 2,3 per cent at the end of January 2008 to 3,8 per cent at the end of December 2008.
Concentration in the South African banking system
The level of concentration in the South African banking sector, measured using the Herfindahl–Hirschman Index (H-index) amounted to 0,189 at the end of December 2008 (December 2007: 0,190). The H-index remained high in 2008 due to the continued dominance in terms of market share by the four largest banks.
1.2. International Monetary Fund Basel II assessment
South Africa implemented Basel II with effect from 1 January 2008. During the course of 2007, the IMF approached the Department with a request to conduct a pilot study on the South African implementation of Basel II. The pilot study comprehensively covered the entire Basel II implementation process, and included visits to three banks and meetings with an auditing firm and a rating agency.
The purpose of the pilot study was twofold in that it served as an independent assessment and benchmarking of the South African implementation of Basel II and it enabled the IMF/World Bank to test and calibrate their joint approach to, and documentation of, the assessment of a country’s Basel II implementation for FSAP and Article IV purposes.
The preparation for the IMF team’s visit stretched over a number of months, and entailed the Department studying detailed instructions, completing comprehensive questionnaires and submitting extensive relevant information to the IMF/World Bank team.
The IMF team presented the Department with their final report during June 2008 which contained the following statement:
“Overall, the Basel II implementation process in South Africa has been of high quality, backed by professional and competent supervisory staff and a strong buy-in from the industry, and reflects a high degree of compliance with the criteria in the methodology.”
The recommendations contained in the IMF/World Bank report have been converted into action plans the implementation of which are being monitored by the Department.
1.3. Securitisation
Although the root cause of the international financial market crisis, in essence, derives from the risk-taking behaviour of investors, banks, consumers and other market participants, it highlighted the risks posed to the soundness of financial institutions by securitisation vehicles, conduits and special investment vehicles due to the deterioration in the quality of assets housed in such vehicles.
In the light thereof and in the interest of the stability of the domestic banking sector, the Department deemed it necessary to commission an independent review of all securitisation schemes in respect of which all banks were participating, in order to determine whether or not such schemes were being managed proactively.
The review of the securitisation market was akin to a due diligence exercise and provided factual evidence of the various risks facing entities that were participating in securitisation schemes. Key aspects relating to securitisation schemes and banks that were reviewed included legal risk, accounting treatment and risk management.
The final report noted that securitisation in South Africa was less complicated compared to the USA and European countries, and that the assets housed in South African schemes tended to have a high level of transparency. Also, assets securitised had been subjected to credit approval processes similar to that applied to banks’ own credit exposures. Other key observations in the report included the following:
1. Generally, risks related to securitisation schemes were appropriately managed by the banks reviewed.
2. Top-tier South African banks, on average, sourced only 4 per cent of their total funding from securitisation.
3. Transparency with regard to accounting for securitisation schemes could be improved.
4. Regulatory compliance was generally acceptable.
The recommendations flowing from the report are being considered in order to improve oversight and governance, and to reduce risks that could arise with respect to securitisation schemes. The Department will engage with the banking sector in a consultation process on areas where changes or amendments to legislation are considered necessary.
1.4. Compliance with anti-money laundering (AML) and the combating of the financing of terrorism (CFT) standards
The Department continued its co-operation with the Financial Intelligence Centre (FIC) and it remains committed to facilitating the optimisation of banks’ compliance with AML and CFT measures.
The Financial Intelligence Centre Amendment Act, 2008 (Act No. 11 of 2008) was assented to by the President of the Republic of South Africa on 22 August 2008 and was published on 27 August 2008 in Government Gazette No. 31365.
South Africa is one of the countries outside the EU that is currently regarded as having AML/CFT systems that are equivalent to those of the EU. The listing of a country follows the results of public evaluation reports adopted by the Financial Action Task Force (FATF), FATF-style Regional Bodies, the IMF or the World Bank
As a member of FATF, South Africa underwent a FATF/Eastern and Southern Africa Anti-Money Laundering Group on-site mutual evaluation country assessment during August 2008. In preparation for the mutual evaluation the Department, assisted by a consultant from the Basel Institute on Governance, performed a self-assessment for compliance with the FATF AML/CFT requirements. The Department also assembled a team with diverse skills to perform extensive preparatory work for purposes of the mutual evaluation.
The draft Mutual Evaluation Report (MER) was issued in November 2008. The findings and recommendations contained in the MER, insofar as they are applicable to the Department and the banking sector will be used as a guide to further improve overall compliance with the FATF AML/CFT requirements.
1.5. International Conference of Banking Supervisors
During September 2008, the Department was represented at the International Conference of Banking Supervisors (ICBS). This biennial event is arranged by the Basel Committee on Banking Supervision (the Basel Committee) and it attracted supervisors and central bankers from well over 100 countries. The ICBS focused on the following topical regulatory and supervisory issues:
1. The cross-border dimensions to liquidity risk owing to increased cross-border flows in more integrated and intermediated financial markets. These cross-border interdependencies raise the prospect of liquidity disruptions that could impact financial markets and settlement systems.
2. The improvement of liquidity risk supervision and supervisory approaches.
3. Weaknesses in banks’ liquidity stress testing and contingency funding plans such as inadequate aggregation of risks across groups due to more segregated approaches being followed and contingency funding plans not appropriately linked to stress testing.
4. Liquidity risk disclosure by banks. The general view was highlighted that banks that disclose comprehensive, accurate, relevant and timely liquidity information are better able to access capital markets.
5. Effective liquidity risk management processes, including a framework that comprehensively projects cash flows arising from assets, liabilities and off-balance-sheet items and should incorporate, inter alia, all relevant time horizons, ‘business-as-usual’ and stressed scenarios, business mix and the risk profile of the particular bank.
6. The increased application of fair value measurements in reported financial information. Due to the increasing complexity of financial instruments, the valuation of such instruments has become difficult.
7. Sound provisioning under International Accounting Standards Board standards to reflect prudent and realistic measurements of loans and related income.
8. Bank valuations of complex or illiquid financial instruments has been a focus area since volatility of valuations leads to increased volatility in earnings and regulatory capital.
1.6. Financial Sector Assessment Program (FSAP)
The FSAP is a joint IMF and World Bank attempt to increase the effectiveness of efforts to promote the soundness of financial systems in member countries. Work in terms of the program seeks to identify the strengths and vulnerabilities of a country’s financial system; to determine how key sources of risk are being managed; to ascertain the sectors’ developmental and technical assistance needs; and to help prioritise policy responses.
A joint IMF–World Bank FSAP mission visited South Africa in May 2008 to conduct an FSAP update which included a stress-testing exercise that was performed by a selected number of banks (bottom-up stress testing) and the Department (top-down stress testingA joint IMF–World Bank FSAP mission visited South Africa in May 2008 to conduct an FSAP update which included a stress-testing exercise that was performed by a selected number of banks (bottom-up stress testing) and the Department (top-down stress testing). The Department co-ordinated the stress-testing exercise with commendable support from the industry’s banking participants. The results of the stress tests suggested that capital and reserve cushions at banks were sufficient to absorb large shocks.
The key findings and recommendations flowing from the FSAP mission included the following:
Key findings:
1. South Africa’s sophisticated financial system is fundamentally sound and has so far weathered the global financial market turmoil without major pressures. Banks and insurance companies remained profitable and capitalisation levels and reserves were adequate.
2. Money, foreign-exchange and capital markets are relatively well developed, but may be subject to contagion risks, given their close linkages with offshore markets.
3. The framework for contingency planning and emergency liquidity assistance has been strengthened.
4. The financial-sector regulatory framework is modern and generally effective.
5. However, the system faces increased macro-financial risks and financial institutions are braced for a less-benign environment including increased credit risk.
Key recommendations:
1. Strengthen the off-site stress-testing capacity and employ this capacity to inform the regular supervisory discussions.
2. Remain vigilant on credit risk (in particular retail and concentrated corporate exposures).
3. Enhance focus on liquidity and funding issues, and discuss medium-term strategies to reduce banks’ dependency on wholesale market funding.
4. Review all strategies regarding crisis management and consider undertaking a crisis simulation exercise relating to a macro-financial shock.
5. Enhance day-to-day collaboration among the staff of the different sectoral regulators in respect of individual institutions and emerging risk issues.
1.7. International Monetary Fund Article IV consultation
In terms of Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with member countries, usually on an annual basis. Economic and financial information are collected and the economic developments and policies of a country are discussed with officials. A Staff Report is prepared by the IMF, which forms the basis for discussion by the IMF Executive Board, which is followed by the issue of a Public Information Notice (PIN) summarising the views of the Executive Board. PINs are issued with the consent of the country concerned.
The IMF Executive Board concluded an Article IV Consultation with South Africa (PIN No. 08/137) in October 2008. The key findings and recommendations from the Staff Report, specifically applicable to the Department, included the following:
1. South Africa’s financial system is sound, underpinned by a well-established legal and financial infrastructure, and a generally effective regulatory framework.
2. Owing to the effects of slowing economic activity and rising interest rates on asset quality and returns, the banking system is facing elevated credit risk in its household loan portfolio.
3. The IMF welcomed the strengthening of South Africa’s framework for contingency planning and emergency liquidity assistance as a bulwark for mitigating the fallout should an adverse event occur.
4. South Africa’s regulatory framework for the financial sector is modern and generally effective. It was suggested that consolidated supervision of financial conglomerates could be strengthened further
1.8. National Treasury initiative on Islamic financial services
The National Treasury initiated a project named ‘Gateway into Africa’, the purpose of which was to explore the need for, and development of, Islamic financial services and instruments for southern Africa and Africa. The Department, along with The Banking Association South Africa and other industry players, has provided its full support to the project. The Department is serving on the Islamic Banking working group and will consider any recommendations relating to regulatory constraints that may emerge from the aforementioned working groups.
Notwithstanding the fact that there is no legislation dedicated solely to Islamic banking, South Africa’s current banking regulatory framework facilitates Islamic banking and Islamic banking products. Banks that are registered in South Africa and provide Islamic banking products to their clients include Albaraka Bank Limited, Habib Bank Limited, HBZ Bank Limited, ABSA Bank Limited and First National Bank, a division of FirstRand Bank Limited.
1.9. Skills development
The implementation of Basel II reconfirmed the need to train and retain staff with the necessary expertise and skills. The continuous improvement of the skills base of the Department is regarded as key to its success and, accordingly, considerable resources are allocated for this purpose. The Department formulated its staff training and development policy and framework in order to facilitate and develop a structured and co-ordinated training plan in respect of every staff member and a training framework for the Department in general.
2. Chapter 2
This chapter reports on the key supervisory and regulatory developments during 2008, with specific focus on the revised regulatory and supervisory approach adopted by the Department subsequent to the implementation of Basel II. These include the following:
2.1. Use of external audit
The implementation of Basel II resulted in a material revision of the information being submitted to the Department in terms of the regulatory returns prescribed by the Regulations. One of the specific tools applied by the Department to determine the accuracy and completeness of returns submitted by banks, as well as to determine banks’ level of compliance with the Banks Act and the Regulations, is the submission by the banks’ external auditors of audit reports in terms of regulation 46 of the Regulations.
The Department commissioned an interim review by external auditors of banks’ regulatory returns as at the June 2008 reporting month, to assess and report on the quality of banks’ reporting to the Department. The reports were submitted during the fourth quarter of 2008 and will enable the Department to follow up on critical reporting issues.
Also, during December 2008, the Basel Committee released a publication on the use of external audit, which highlights the need for quality external audits to enhance supervision and market confidence.
2.2. Internal capital-adequacy assessment process (ICAAP)
The process of incorporating Basel II into the regulatory framework included amendments to accommodate Pillar 2 requirements relating to capital management, ICAAP assessments and updating of the supervisory review and evaluation process (SREP). The adequacy of a bank’s capital needs to be assessed by both a bank and the Department. In terms of the Banks Act and the Regulations, banks are required to perform an ICAAP and the Department is required to perform a SREP.
From a supervisor’s perspective, prior to the implementation of Basel II, no ICAAP reviews had been undertaken. The review of banks’ ICAAPs was, therefore, a new area that required innovative thinking. International specialist consultants were contracted to provide training to the Department’s staff and a successful training programme was undertaken and completed during February 2008.
Following the development of the regulatory framework and the completion of training, formal ICAAP reviews commenced with an initial focus on the five largest banks in South Africa, representing 89,8 per cent of the South African banking-sector assets at the end of December 2008. The reviews revealed that the banking industry expended a significant amount of resources on the implementation of their economic capital frameworks and the development of their ICAAPs and have made significant progress in that regard.
Future ICAAP review work to be performed will include focussed thematic reviews, the review of smaller locally registered banks during 2009 and the review of branches of international institutions from 2010 onwards.
2.3. Credit risk
The introduction of Basel II, with its more sophisticated approach to credit risk, including the potential for banks to use models to calculate regulatory capital, combined with macroeconomic events of the past year placed significant demands on the Department’s resources. Although South African banks have not experienced the same magnitude of impact as a result of the global financial market turmoil and downturn in economic conditions as banks in other parts of the world, the Department continued to monitor the impact of market conditions on South African banks’ credit risk profiles and portfolios through quantitative analysis and focused reviews.
Under Pillar 1, banks in South Africa could implement the following approaches to determine the minimum required regulatory capital relating to credit risk with effect from 1 January 2008:
1. The standardised approach (SA)
2. Foundation internal ratings-based (FIRB) approach
3. Advanced internal ratings-based (AIRB) approach.
As at the end of December 2008, South African banks implemented the following approaches:
| Approach | Locally registered banks | Branches of international banks | Total |
| SA | 15 | 13 | 28 |
| FIRB | 1 | 1 | 2 |
| AIRB | 3 | - | 3 |
Focused reviews commenced during the second quarter of 2008, and spanned selected retail and wholesale portfolios. Focused on-site reviews were held at all five of the banks that had obtained approval from the Registrar to adopt the IRB approaches. On-site reviews were scoped based on the following key elements:
1. The change in the regulatory capital requirements of a bank moving from Basel I to Basel II or moving from SA to the FIRB or the AIRB approaches.
2. A statistically based model monitoring system (MMS) was developed internally using information submitted by banks through the regulatory returns. The purpose of the MMS is to monitor the performance of banks’ IRB credit models.
3. Qualitative issues pertinent to each bank were identified to focus the reviews at banks.
4. The Department developed a series of self-assessment templates to be completed by a bank assessing their own compliance with the minimum IRB requirements.
5. Whether a bank was implementing new or revised models and rating systems.
Banks were generally in compliance with the relevant requirements in the Regulations. In instances where non-compliance was observed, the respective issues were communicated to the management of the relevant banks for their attention and those issues are in the process of being addressed by the banks concerned.
2.4. Operational risk
Operational risk is not a negligible factor in the field of financial services. It permeates all aspects of the risk universe, that is, operational risk overlaps and exacerbates all other types of risks, such as market, credit, liquidity and underwriting risk. In line with the Department’s SREP, a risk-based approach has been applied to the review of banks’ operational risk.
As at the end of December 2008, South African banks implemented the following operational risk approaches:
| Approach | Number of banks |
| Basic Indicator Approach | 20 |
| The Standardised Approach | 9 |
| Alternative Standardised Approach | 2 |
| Advanced Measurement Approach | 2 |
During 2008 the Department focussed, inter alia, on the following:
1. Assessment of boards’ involvement in the oversight of banking institutions’ operational risk framework.
2. Focused operational risk reviews were performed.
3. Processing of new applications by banks to apply the range of approaches for calculating their operational risk capital requirements.
4. Participation in the 2008 Loss Data Collection Exercise.
2.5. Consolidated supervision
Basel II introduced a three-pillar approach with all three pillars being applicable on a solo and consolidated basis. Basel II introduced the following major changes to the Department’s regulatory and supervisory approach:
1. The scope and application now specifically include any holding company that is the parent company within a banking group.
2. All internationally active banks should comply with Basel II.
3. The framework should now be applied to all internationally active banks at every tier within a banking group.
4. Insurance and commercial entities are now specifically excluded when calculating group capital adequacy.
5. Only majority-owned and controlled banking, securities and financial entities, regulated or unregulated, should be included in the calculation of group capital adequacy
2.6. Stress testing
Supervisors around the world have maintained that a robust programme of stress testing is a necessity for effective risk management. In South Africa banks were formally required to implement the stress-testing elements, set out in the Regulations, for the first time in January 2008. However, banks’ stress-testing programmes were already being enhanced ahead of the implementation of Basel II.
The Regulations set out the core regulatory stress-testing requirements for banks in South Africa. These include sensitivity and scenario analysis covering individual risk areas and whole bank stress testing. Such stress tests are required under Pillar 1, which captures minimum regulatory capital requirements for the key risk areas, namely credit, market and operational risk, and under Pillar 2, which reviews whole bank risk in a SREP. Specific stress testing is required under Pillar 1 for advanced approaches to risk measurement of credit, market and operational risk. A more general requirement is made of all banks under Pillar 2 for holistic bank stress tests as well as some individual risk area stress tests, such as interest rate risk in the banking book.
The Department emphasised at an early stage the importance of an appropriate governance framework for stress testing. Board approval, senior management oversight and internal audit involvement are all key, and governance was a focus of all discussions with banks regarding their stress-testing frameworks. Other key issues that emerged during the Department’s interaction with banks include the following:
1. The relevance of the economic scenarios to a particular bank.
2. The appropriateness of the severity of scenarios.
3. The extent to which diversification was considered.
4. The appropriateness of the time frame of the scenarios.
5. Correlation factors.
6. Etc.
Ongoing debate with, and feedback to, individual banks has been the primary communication channel to help banks strengthen their stress-testing frameworks throughout 2008, and will continue into 2009. In addition, the Department developed a more detailed guidance note (Note 9/2008) to assist banks in taking forward their Pillar 1 and Pillar 2 stress testing in particular in relation to four key areas, namely:
1. The differences between Pillar 1 and Pillar 2 stress tests.
2. The appropriate severity of stress scenarios.
3. The use of reverse stress testing.
4. The role of senior management.
2.7. The Department’s own stress testing
In order to ensure effective challenges to banks’ own stress testing and to gain an effective macro-oversight of the banking system, the Department continued to develop its own stress-testing expertise by working in conjunction with other departments in the Bank and with international organisations. The Department’s staff spent significant resources researching and building capacity for stress testing, which enhances its ability to better understand systemic weaknesses in the banking sector and it provides a stronger base from which to challenge the output of banks’ own stress testing more effectively.
2.8. Market risk
Banks are required to hold capital to cover their position risk arising from exposures to financial markets and the risk of idiosyncratic change in value of financial assets with exposure to individual companies. In terms of the Regulations all banks with exposure to foreign currencies are required to hold capital for the market risk associated with exchange rate fluctuations. Previously (i.e. prior to 1 January 2008), foreign-exchange risk could be reported as a component of credit risk.
Counterparty risk emanating from trading activities was previously also a part of market risk capital requirements, but is treated as a component of credit risk under the revised Regulations.
Furthermore, market risk no longer includes elements aimed at addressing concentration risk and operational risk arising from trading activities.
The revised Regulations include only two alternative reporting methods for market risk, namely the internal models-based (IMA), and the standardised approach (TSA), whereas under previous regulations a simplified approach was also available to banks. Banks are also permitted to apply a combination of TSA and IMA reporting when required to do so or under circumstances approved by the Registrar. At present five of the twenty-six banks with market risk exposure have permission to report according to the IMA.
The revised Regulations also introduced a capital requirement for banks’ exposures to equities that are generally held for investment purposes, and which are included in the banking book for accounting purposes. Fourteen banks reported exposures of this nature during the course of 2008. Capital charges under these regulations contributed to approximately 5,5 per cent of banks’ total capital requirements.
As part of its SREP, the Department conducted risk-based assessments in order to gain greater insight into the sources of risk and management controls of banks. During the course of 2008, two banks were assessed on equity risk in their banking book. Each assessment encompassed an off-site evaluation of a documented submission by the bank elaborating the framework in use for identifying, measuring, monitoring, reporting and controlling the risks. This was followed by an on-site review to gain a first-hand perspective on the banks’ operational conduct and risk management. Banks are primarily measured against compliance with the Regulations relating to Banks, but the tenets of the Core Principles developed and published by the Basel Committee are also used as a yardstick for basic minimum standards.
3. Chapter 3
This chapter highlights developments in the South African banking regulatory framework:
3.1. Developments relating to the Banks Act, the Regulations, the Branch Regulations and the Securitisation Notice
A key responsibility of the Department is to ensure that the legal framework for the regulation and supervision of banking groups in South Africa remains relevant and current. Consequently, the legal framework pertaining to banking regulation has to reflect local and international market developments, and has to comply with the applicable international regulatory standards and best practices.
The following pieces of subordinate legislation were also amended during the period under review, in the main, to comply with the principles of Basel II:
1. The Regulations relating to Banks, 2008 were published in Government Gazette No. 30629 dated 1 January 2008
2. The “Conditions for the conducting of the business of a bank by a international institution by means of a branch in the Republic” (Branch Regulations) were published in Government Gazette No. 30627 dated 1 January 2008
3. The Notice for the “Designation of an activity not falling within the meaning of ‘the business of a bank’ (Securitisation Schemes)” was published in Government Gazette No. 30628 dated 1 January 2008.
Apart from the international developments, the Department has also taken cognisance of the developments within the banking industry, the markets and new or amending legislation that might have an effect on banks and/or banking regulation or supervision.
4. Chapter 4 and Appendix 6
In these sections of the report the trends in the South African Banking sector, based on risk-based information submitted by banks during 2008, are outlined:
4.1. Structural features of the banking sector
International shareholders accounted for 46 per cent and domestic shareholders for 32 per cent of the banking-sector shares in issue at the end of December 2008. Minority shareholders (i.e., shareholders with individual shareholdings to the value of less than 1 per cent) accounted for 22 per cent of the banking-sector shares in issue. The ratio of banking-sector assets to GDP increased to 135,0 per cent at the end of December 2008, up from 120,4 per cent at the end of December 2007 (March 2000: 85,1 per cent).
4.2. Balance-sheet structure
At the end of 2008, banking-sector assets amounted to R3 170 billion, representing an annual growth rate of 24,5 per cent year on year (January 2008: 27,0 per cent). Growth in gross loans and advances eased to 9 per cent at the end of December 2008 compared with 19,2 per cent at the end of January 2008. The lower growth rate in gross loans and advances during 2008 may be attributed to a tighter monetary policy stance and the implementation of more stringent risk-based lending criteria by banks. Loans and advances to customers remained the largest portion of banking-sector assets, amounting to R2 276 billion at the end of December 2008 (71,8 per cent of banking-sector assets), compared with R2 077 billion at the end of January 2008 (78 per cent of banking-sector assets).
At the end of December 2008, banking-book assets represented 81,3 per cent of banking-sector assets (January 2008: 85,5 per cent) while trading-book assets represented 18,7 per cent (January 2008: 14,5 per cent). Total deposits amounted to R2 379 billion at the end of December 2008 (January 2008: R2 108 billion), of which, fixed and notice deposits, call deposits and current accounts were the main contributors. At the end of December 2008, fixed and notice deposits amounted to R593 billion (January 2008: R533 billion), call deposits to R525 billion (January 2008: R467 billion), and current accounts to R415 billion (January 2008: R403 billion). Corporate and retail customer deposits represented a significant portion of the total funding of the banking sector throughout 2008 and represented 63,2 per cent of total deposits at the end of December 2008.
4.3. Capital adequacy
From a solo reporting perspective, both the total capital-adequacy and the tier 1 capital-adequacy ratios of banks improved throughout 2008 from 11,8 per cent and 8,9 per cent respectively at the end of January 2008 to 13,0 per cent and 10,2 per cent respectively at the end of December 2008. The two key reasons for the improving trends were (1) the increase in qualifying primary capital and (2) the slowdown in asset growth during the period under review.
Total equity amounted to R181 billion at the end of 2008, compared with R154,4 billion at the end of January 2008. Share capital and retained earnings comprised approximately 90 per cent of total equity throughout 2008. At the end of December 2008, the financial leverage ratio for the domestic banking sector amounted to 17,7 times (January 2008: 17,3 times). In comparison, many large global banking institutions reflected leverage ratios in excess of 30 times and, in certain instances, as high as 60 times.
4.4. Profitability
Banks reported favourable profitability ratios throughout 2008, despite the global financial market turbulence. At the end of December 2008 the ROE ratio amounted to 28,7 per cent and ROA ratio amounted to 1,62 per cent (January 2008: 24,1 per cent and 1,39 per cent respectively). Banks generated operating profit for the year of R44,2 billion (i.e., gross operating income less credit losses, operating expenses and indirect taxation) and the total profit (after tax) for the year amounted to R35 billion. More than 80 per cent of gross operating income was derived from banking-book income during 2008. Staff expenses continued to be the main contributor to operating expenses during 2008 (52,6 per cent of total operating expenses). At the end of 2008, the cost-to-income ratio amounted to 42,2 per cent compared with 47 per cent at the end of January 2008.
4.5. Liquidity risk
During 2008, the average liquid assets held by banks consistently exceeded the minimum regulatory requirement by an increasing margin. The liquid assets held, measured against the minimum liquid asset requirement, increased from 111,1 per cent at the end of January 2008 to 115,5 per cent at the end of December 2008. Total short-term liabilities (the sum of contractual liabilities maturing within one month) as a percentage of total liabilities improved from 59,7 per cent at the end of January 2008 to 53,7 per cent at the end of December 2008. The ten largest short-term depositors as a percentage of total liabilities (not including equity) declined from 8,6 per cent at the end of January 2008 to 7,2 per cent at the end of December 2008.
4.6. Credit risk
During 2008 credit risk remained a key focus area of the Department, considering the challenging local and international economic developments. The implementation of Basel II on 1 January 2008 introduced new methodologies, terminologies and a menu of approaches for the measurement of banks’ exposure to credit risk for the calculation of minimum capital requirements.
Total impaired advances increased from R47,6 billion at the end of January 2008 to R87,3 billion at the end of December 2008, representing an increase of 83,4 per cent for the period. The ratio of impaired advances to gross loans and advances increased from 2,3 per cent at the end of January 2008 to 3,8 per cent at the end of December 2008. The main contributor to this deterioration during 2008 was the delinquencies experienced in the retail asset class, with specific reference to mortgage loans (home loans) and revolving credit.
Specific and portfolio credit impairments increased by 61,6 per cent and 32 per cent respectively, during 2008. Expressed as a percentage of impaired advances, specific credit impairments decreased from 37,0 per cent at the end of January 2008 to 32,7 per cent at the end of December 2008. Expressed as a percentage of gross loans and advances, specific credit impairments increased from 0,8 per cent at the end of January 2008 to 1,2 per at the end of December 2008. The increasing interest rate cycle, high levels of household indebtedness, and other unfavourable local and international economic conditions contributed to this deteriorating trend.
4.7. Market risk
The total market risk regulatory capital requirement increased from R2,3 billion at the end of January 2008 to R3,1 billion at the end of December 2008. The capital requirement in respect of interest rate instruments remained the largest contributor to the total market risk requirement, representing more than 50 per cent of the requirement during the period under review.
Derivative turnover activities throughout 2008 were mainly in respect of foreign exchange and interest rate derivative contracts. Furthermore, unexpired interest rate derivative contracts represented approximately 80 per cent of the total unexpired derivative contracts throughout 2008, which were indicative of increased hedging against expected domestic interest rate changes
4.8. Currency risk
The aggregated effective net open foreign-currency position as a percentage of qualifying regulatory capital fluctuated substantially during 2008 as a result of the significant variation in the actual aggregated effective net open foreign-currency position. Nevertheless, the ratio peaked at 2,6 per cent during the period under review, well within the 10 per cent regulatory limit.
Appendices 1 to 5 and 7 to 10
These appendices contain useful administrative information.
Contact person:
Mr Brian Hoga
+27 12 313 4448
Brian.Hoga@resbank.co.za
See attachment / link box for more detail.
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