Banks stand up to stress test, says report
April 26, 2007
By Ethel Hazelhurst
Johannesburg - South African banks are well capitalised, though the sector's capital adequacy ratio has slipped slightly since June last year.
The Reserve Bank's financial stability report, released yesterday, said the capital adequacy ratio for the sector was 11.9 percent in January - a marginal decrease from 12.1 percent in December 2006 and the 12.4 percent recorded in June.
However, the figure is above the minimum requirement of 10 percent. The biannual report says: "Stress testing showed that, in December, the banking sector remained strong and resilient to a range of plausible adverse impacts on loan assets."
The asset quality of banks showed a slight improvement between June and December 2006. Measured as a percentage of total loans and advances, gross overdue loans fell from 1.2 percent to 1.1 percent. This category included both doubtful and uncollectible debt.
Banks remain heavily exposed to the household, finance and insurance sectors. The former represent 45 percent of the total and the latter 25 percent, the report says.
This is significant because concentration in a sector makes banks vulnerable to adverse developments. However, the report says: "The [finance and insurance sector] is of less concern as credit to this sector includes inter bank lending."
The banks are not only sound but profitable, it says. Sector profitability improved during the review period and in the first month of 2007. Return on equity rose from 16 percent in June to 18.3 percent in December and 18.6 percent in January. This is measured by the ratio of net income to total equity, smoothed over 12 months.
Return on assets also increased, to 1.4 percent in December and January from 1.2 percent in June.
"Good banking sector earnings are important for financial stability as they enable banks to use current income to cover losses, without reducing their buffer capital," the report says.
It also explains aspects of risk. "Generally the most relevant components of market risk are interest rate and exchange rate risk," it says. "Uncovered foreign debt, as a percentage of net qualifying capital and reserves, is a measure of banks' foreign exchange exposure. After an initial decline from 1.9 percent in June to 1.5 percent in December, this ratio increased to 2.5 percent in January.
"This is still very low; in fact the exposure of banks to foreign exchange risk has been fairly limited … and is unlikely to be a source of stability problems."
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