SA dwarfs rest of Africa.

South Africa’s banking sector stands like a towering giant on

the African continent. The country’s leading banks have also been

great innovators. 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. Information technology. The country’s banking strength

is reflected by its domination of the continent’s banking assets

and capitalization. About 80% of combined sub-Saharan bank assets and

72% of total capitalization 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've 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. Investec Bank, a

comparatively new investment bank, with $15bn under global management.

The banks operate in a regulatory environment that's 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 rationalization 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

service costs.

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. 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

bank accounts.

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 recognize pensioners by their thumbprints. The system has

reduced fraud.

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. 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. 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. Privatization. Portfolio management services

for liquidity rich institutional investors (controlling assets of

R600bn) and for 100,000 High Net Worth Individuals are also potential

growth areas.

Bankers estimate privatization deals to yield R25bn over the next few


The internationalization 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. Societe Generale. Among new arrivals this year are

the Bank of Tokyo, Sumitomo Bank, Banque Nationale de Paris. Korea

Exchange Bank.

Rich pickings

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

southern Africa.

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. Merrill Lynch. These

investment banks are becoming active in the fixed income, forex and

derivative markets. They're 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 privatization programme,

an area in which local banks generally lack international experience. In

1996. 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.


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