SA RESERVE Bank governor Lesetja Kganyago. ANA
CAPE TOWN - The banking sector experienced a slight decline in profitability in the year to March 31, but despite a weak economy banks grew their assets 8.7percent and remained well capitalised, according to the first annual report of the Reserve Bank’s Prudential Authority (PA) released yesterday.

The (smoothed) return on equity for the banks fell slightly, by 0.57percent, over the year, while the return on assets fell by 2.29percent. The cost-to-income ratio increased marginally to 57.75 from 57.24 in 2018.

The report showed total bank assets increased to R5.65trillion from R5.2trln the previous year, in spite of the sluggish economy, with, for instance, gross domestic product growth coming in at a meagre 0.8percent last year, and -3.2percent in the first three months of 2019.

The South African banking sector is dominated by five large banks, which collectively held 90.5percent of the total banking sector assets at March 31, 2019, with local branches of international banks accounting for 5.6 percent of banking sector assets.

The level of impairments remained relatively high. Impaired advances as a percentage of gross loans and advances increased from 3.31percent in 2018 to 3.77percent in 2019 - a 13.9 percent rise. Overall impaired advances increased 23.9percent to R159billion from R128bn, driven largely by an increase in specific impairments due to the implementation of International Financial Reporting Standard (IFRS) 9 in 2018, with larger corporates moving into the non-performing category, the PA said in its report.

However, the slight deterioration in profitability does not appear to be reflected in the improvement in share prices of the banks since the start of 2019, also, in spite of the weak economy.

An overview of the share prices of the banks that make up the FTSE/JSE Banks Index over six months showed Absa’s share price up 15.97percent, Capitec up 21percent, FirstRand up 9.26percent, Standard Bank up 15.5percent, while RMB Holdings was up 10.73percent.

Banks had remained adequately capitalised, with capital adequacy ratios well above the minimum statutory requirements, the PA said.

Reserve Bank governor Lesetja Kganyago said in the annual report that the bank had conducted stress tests on six major banks to assess their resilience to a selection of hypothetical severe but plausible macroeconomic scenarios, and the banks remained well capitalised across all scenarios.

Cannon Asset Management chief executive Dr Adrian Saville said the factors that had possibly improved the outlook for banks were subdued inflation, the possibility of an interest rate cut, a steady bond market and an improvement in the “general supporting infrastructure”, which included the appointment of the new president and international ratings agencies that were “slightly more comforted” in their assessments of the economic future of the country. A bank sector analyst, who asked to remain anonymous, said the main reason the banks have remained financially sound despite the weak economy was conservative lending practices and keeping a tight control over credit loss ratios.

And although there might be some further credit loss ratio deterioration by the end of June and limited growth in lending, banks’ share prices had likely risen on expectations that the worst might be over for the economy. Local banks were well capitalised compared with banks in many other countries.

The PA was launched in 2018 to conduct oversight and supervision of the financial sector, and the relevant institutions were gradually integrated into the PA over the year.

BUSINESS REPORT