South Africa’s banking sector stands like a towering giant on
the African continent. The country’s leading banks have also been
great innovators, for example, introducing the first ATMs that can read
thumbprints. However, as MOIN SIDDIQI reports, competition has
intensified with the influx of a large number of foreign banks.
South Africa enjoys a unique position among emerging markets because
of its first-world service industry in banking, insurance, capital
markets, and information technology. The country’s banking strength
is reflected by its domination of the continent’s banking assets
and capitalisation. About 80% of combined sub-Saharan bank assets and
72% of total capitalisation are concentrated in South Africa. South
Africa constitutes one-third of the GDP of the entire sub-Saharan
The banking sector is highly concentrated with only five out of a
total of 39 registered local banks controlling 80% of aggregate assets.
They have about 3,640 branches and electronic delivery networks. Among
the major banks are Amalgamated Banks of South Africa (ABSA), Standard
Bank (Stanbic), First National Bank (FNB), Nedcor, and Investec Bank, a
comparatively new investment bank, with $15bn under global management.
The banks operate in a regulatory environment that is more
characteristic of OECD economies than those of developing countries. The
South African Reserve Bank’s supervision involves one of the most
up-to-date and sophisticated systems of risk evaluation and risk
management. All banks, including foreign ones must maintain a capital
equivalent of 8% of risk-weighted assets. Last year, the average Basle
ratio, (including both tier 1 and 2 capital) was 12% for top SA banks
and compares favourably with major OECD banks.
Reporting and provisioning requirements are also stringent. High real
prime rates since 1996 have severely hit small businesses, thus leading
to an increase in banks’ bad debt provisions.
Profitability remains reasonably healthy with major banks achieving
average returns on equity and assets of 24.3% and 1.5% respectively.
However, the cost/income ratios of almost 70% are above international
averages, indicating a need for rationalisation and improved efficiency.
Nevertheless, credit-ratings for top-tier SA banks are on a par with
some major OECD banks.
The market has grown dramatically since the lifting of international
sanctions. Competition has reduced margins on interest rates and fees,
whilst similar product offerings have resulted in highly competitive
Advanced banking technology
Despite decades of political isolation, SA banks have always been
among pioneers of advanced banking technology, especially in biometrics
and retail banking.
South Africa’s technological superiority over even the developed
countries was reaffirmed when Visa International introduced its first
multifunction smart card in alliance with two SA banks, FNB, and Nedcor.
Both banks are investing R7bn and R5bn respectively in upgrading
technology at retail outlets and ATM terminals for the new card, which
will replace separate debit and credit cards.
In the post-apartheid era, major banks are launching extensive
innovative schemes to serve a potentially large underbanked clientele.
An estimated 10m South Africans or 25% of the total population have no
In 1996, FNB introduced a brilliant new programme called Cash
Paymaster Services which has completely revolutionised the process of
paying out state pensions to recipients in rural areas. Special security
trucks are fitted with modified ATMs. They arrive at remote rural
communities, the pensioners place their thumbs on a biometric reader and
the ATMs recognise pensioners by their thumbprints. The system has
Major banks have also now formed separate institutions, focusing on
delivering low cost and viable services (ranging from savings accounts
to small house mortgages) to the unbanked masses in the townships and
former homelands. ABSA has recently established Nubank, last year Nedcor
launched People Bank, and E Bank was set up by Stanbic.
The government expects the banks to make a tangible contribution
towards the Reconstruction and Development Programme, especially in
housing, export financing, agriculture and small business development.
Stanbic, Investec, and Southern Life have set up investment mechanisms
to help finance a R70bn R&D plan.
Bankers are optimistic about long-term growth. They point to
increasing opportunities within an expanding economy. They look forward
to greater demand for trade and corporate finance and advisory services.
These include cross-company and border transactions, mergers and
acquisitions and black empowerment deals – arising from the unbundling of major corporations. Privatisation, and portfolio management services
for liquidity rich institutional investors (controlling assets of
R600bn) and for 100,000 High Net Worth Individuals are also potential
Bankers estimate privatisation deals to yield R25bn over the next few
The internationalisation of SA markets has led to an increasing
influx of foreign banks which now total 70. Most of these have relocated
since April 1994 but their influence has increased since May 1995
following the Banking Amendment Act of 1994. This permitted [TABULAR
DATA OMITTED] foreign banks to be incorporated and capitalised and to
access the capital of their parent companies. The minimum capital
requirement is R50m.
Among banks which have set up branches are Citibank, ABN-Amro, ING
Bank, Banque Indosuez, Commerzbank, Barclays Bank, Chase, Deutschebank,
Credit Lyonnais, and Societe Generale. Among new arrivals this year are
the Bank of Tokyo, Sumitomo Bank, Banque Nationale de Paris, and Korea
SA offers rich pickings for foreign banks which include opportunities
to tap businesses from the 30-40 top blue chips, including Anglo
American, De Beers, SA Breweries, Liberty Life Association of Africa, as
well as scope for expanding intra-regional trade and investment into
Thus the degree of competition has intensified due to the influx of
major foreign banks. Margins in the corporate market are declining;
margins for top SA bluechips are as low as 25 to 50 basis points over
Foreign banks can expect aggressive competition from major local
banks in traditional areas such as money market and forex dealing, local
mergers and acquisitions and structured finance.
The deregulation, in November 1995, of the Johannesburg Stock
Exchange, which permits banks, including foreign ones, to become stock
brokers, has attracted some major investment banks like SBC Warburg,
Morgan Grenfell, Robert Fleming, Natwest Markets, Smith New Court,
Bankers Trust, CS First Boston, JP Morgan, and Merrill Lynch. These
investment banks are becoming active in the fixed income, forex and
derivative markets. They are also involved in international debt, equity
financing, cross-border strategic mergers and acquisition advice.
Foreign banks have about 20%-30% exposure in local corporate and
government bond markets. In January 1996, capital adequacy requirements
for securities trading were established in accordance with the European
Union’s Capital Adequacy Directive.
Small merchant banks, as a result of the gradual capital decontrols,
are expanding their asset management capabilities mainly through
strategic alliances with foreign firms.
Foreign banks are keen to participate in the privatisation programme,
an area in which local banks generally lack international experience. In
1996, for example, HSBC was awarded advisory work on the partial
sell-off of Telkom.
The South African market is overbanked, especially with the influx of
foreign banks. As the market develops, mergers of local small banks
appear likely and the number of foreign banks should dwindle.