Banks fight for share of savings market

Ethel Hazelhurst

SOUTH Africa’s major banks may operate in an oligopoly when it comes to corporate and retail banking but there are areas of strong competition within the wider financial system, according to a report released yesterday by rating agency Standard & Poor’s (S&P) on the outlook for banking.

The four largest banks between them hold more than 80 percent of total banking sector assets. In 2006 they were the target of an investigation by the Competition Commission because of their entrenched position in the market.

However, this benefit does not extend to deposit taking. S&P said contractual savings were “dominated by institutional investors, which fund more than 30 percent of bank liabilities”.

Institutional investors include retirement funds, long-term insurance companies, collective investment schemes and asset managers.

S&P banking analyst Matthew Pirnie said banks were starting to compete for a direct share of the contractual savings market, moving away from short-term wholesale funds towards retail deposits.

“As a result of the banking sector’s efforts, institutional investors will no longer be able to rely on high margins from money market funds and bank placements.”

On the bank lending side, Pirnie predicted moderate growth of between 8 percent and 10 percent, “chiefly fuelled by unsecured lending”.

Pirnie said the unsecured lending market was dominated by the second tier banks and non-bank financial institutions but competition from major banks had increased. This could compel microlenders to lend more, at longer terms, to less creditworthy clients, raising the risks on secured credit.

However, he predicted growth in such bank lending would slow “as banks tighten controls in response to increasing consumer indebtedness and demand for longer terms and higher amounts”. He said the National Credit Regulator had already noted an increase in credit applications denied and described this as positive.

Pirnie predicted higher earnings would help banks position themselves for domestic and international growth.

“South African banks’ strategy on geographic diversification is finally becoming clearer. We expect them to continue to expand into other African countries this year.”

He listed potential developments. Nedbank was expected to exercise its right to convert its $285 million (R2.6 billion) loan into a 20 percent equity stake in Ecobank Transnational late this year or early next year.

Absa, which is to be renamed Barclays Africa Group, would take a controlling stake in Barclays’ Africa operation, which includes subsidiaries in Kenya, Ghana and Botswana.

Standard Bank continued to exit non-core markets “but we expect some investments in Africa this year to maintain its competitive advantage in the continent”. And FirstRand had bought a bank in Ghana and secured a merchant banking licence in Nigeria.

The diversification would be positive for earnings and growth but would not necessarily benefit banks’ ratings because of higher economic and industry risk, Pirnie said. “Furthermore, South African banks have a mixed track record on previous geographic expansions plans, so long-term success is not guaranteed.”