South Africa's banking system has been given a generally clean bill of health by the country's banking watchdog, though the growing levels of household debt and bad loans are continuing to cause concern for the financial sector.
Despite harder times for the global finance industry, South Africa's banks continue to perform well, according to the 2007 annual report by the Reserve Bank's Bank Supervision Department.
The report, released on July 29, said the banks were well capitalised at 12,8% in December 2007, and that the banking sector's assets increased from $281bn at the end of December 2006 to $344bn at the end of December 2007, representing an annual growth rate of 22.7%. Profitability also remained strong in the year under review. The net income of South Africa's banks rose by 20.6% during 2007, reaching $4.25bn at the end of December 2007.
Significantly for South Africa's banks, the sector had little exposure to the collapse of the US subprime mortgage market, with the report saying local banks, "were not impacted directly, but indirect effects were observable".
However, the Bank Supervision Department did warn though that South Africa's banks could be hurt further down the track.
"The wider impact of the global crisis on the local banking sector is still uncertain, but it is expected that as credit spreads widen and pricing for risky assets increases, the borrowing costs of banks will increase," the report said.
While the sector as a whole remained sound, the report did flag a number of concerns. One of these was the increasing level of non-performing loans, which totaled $7.4bn at the end of May compared to $5.9bn in January.
Though unwelcome, Errol Kruger, the registrar of banks, said the rise in bad debt levels was to be expected in the current phase of the interest rate cycle.
"It is not a surprise that bad debts are on the rise and I think it's the first time we've had to handle a cycle like this simultaneously with the global turmoil that's going on. So I think full credit to the banks for a job well done," Krueger told the local media on July 29.
However, with tighter loan criteria, along with bolstered debt collection mechanisms, banks were better able to manage non-performing loans, he added.
Another issue for banks is the increasing number of home-owners who are falling behind in their mortgage repayments. According to a study conducted by asset services firm Alliance Group, 55,000 mortgage holders will be at least one month in arrears by September, more than double the figure for January. As many as 8000 of these properties could end up being repossessed and sold, the report said.
While the level of distressed property selling is on the rise, this trend might not be representative of what is happening in the overall residential property market, Rael Levitt, the chief executive of Alliance Group, was reported as saying.
"In the context of the South African market this is high but it's not like in the US or UK. We are not in that scenario at all because there has been no subprime lending in South Africa," he said on July 29.
Household debt levels continue to be at record highs, hovering around 78% of disposable income. This is despite the Reserve Bank's series of interest rate rises over the past two years, aimed at cooling demand and curbing inflation. The latest increase, announced on June 12, took the Reserve's key repo rate to 12%, up from 7% in June 2006.
Interest rates are up but so is demand for credit. South Africa's total domestic credit extension grew at a rate of 22.82% year-on-year in June, from 20.71% in May, suggesting the central bank's policy of taking the heat out of consumer spending has yet to find its target.
Combined with high levels of debt and interest, inflation is also putting pressure on household incomes. On July 30, Statistics South Africa announced that annualised inflation had hit 11.6% in June, up from 10.9% in May. The monthly increase was the highest in a decade and has sparked speculation of another interest rate rise, a move that would add pressure on the country's lenders and their clients.
Another discordant note sounded by the Bank Supervision Department's report was over bonus schemes for senior bank staff, which could prompt money managers to take undue risks in their dealings to secure incentive payments. "These incentive schemes are often misaligned, being linked to short-term performance, rather than the long-run interests and objectives of the institution,' the report said.
While the banking sector got good grades overall in the report on its activities, a slowing of the domestic and global economy could spell harder times ahead for South Africa's banks.