SA banks face increased credit risk: SARB

JOHANNESBURG - South Africa’s financial system is fundamentally sound but banks should brace themselves for a less benign environment including increased credit risk, the central bank said yesterday.

The bank said in its Bank Supervision Annual Report 2008 that the sector had so far weathered global market turmoil without major pressures. But it said the system faces increased macro-financial risks.
The country’s top banks have forecast lower earnings this year, largely because of rising bad debts as consumers default on loans in the midst of the country’s first recession in 17 years due to depressed local and global demand.
“Notwithstanding the turmoil experienced in international financial markets and the domestic cyclical economic developments during 2008, the South African banking system again remained stable,” the central bank said, adding that local banks were adequately capitalised and profitable.
But 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.
The central bank hiked interest rates by 500 basis points in the two years to June 2008 to fight inflation, but has trimmed them back by 450 basis points since December to ease pressure on the economy.
Bank Registrar and Executive General Manager at the central bank Errol Kruger said the banking sector will experience tough times in the next 18 months.
“The banking sector ... has a tough 18 months ahead,’ Kruger told Reuters in an interview, adding that recovery was largely reliant on the international environment.
“If there were any issues in our banking system which were hidden away I think the Lehman’s (Brothers) collapse would have unearthed them. Our banks were able to manage their way out of that quite remarkably.”
The central bank report said money, foreign-exchange and capital markets were relatively well developed, but may be subject to contagion risks given their close linkages with offshore markets.
It recommended strengthening off-site stress-testing capacity, continued vigilance on credit risk and enhanced focus on liquidity and funding issues.
South Africa’s financial system is dominated by the four big banks: Standard Bank, FirstRand, Absa and Nedbank.
– Nampa-Reuters