Is your money safe in your bank? The question must have crossed your mind at least once this year. Royce Long, the head of financial research at RMB Asset Management, discussed the issue at a recent meeting of the ipac/Personal Finance Investors Club in Johannesburg.
The South African banking system is sound and the loss of confidence in Saambou and BoE was confined to specific banks and not to the industry as a whole.
If, as a bank customer, you want assurance that your desposits and investments are safe, there are various things to watch out for.
Long says bad signs include a bank showing excessive growth, especially in new loans. Banking is a regulated, simple sector. There are few reasons for massive spurts of growth, he says.
You should also watch for changes in the regulations affecting banks; for banks entering into new business areas such as microlending, offshore investments and technology. The frequent turnover of senior personnel should also be a warning sign, as should interest rate anomalies. If one bank offers a higher interest rate than all others, you need to ask the question whether that bank is desperate for your cash because it has internal financing problems.
Negative and excessive press coverage, a steadily declining share price that defies the sector and the size of the bank are other factors to consider.
Overall though, Long does not believe the South African banking system is unsound. "The loss of confidence has been company specific, not sector specific," he says.
Excess capacity with many banks in the country, coupled with fewer opportunities, has created a tough trading environment and the move to fewer, larger banks is in line with global trends.
Our major banks are well capitalised and profitable. They offer good investment opportunities, Long says.
Performance of the sector
In 1998 the banking sector was at its peak for the past decade. From 1993 to 1998, the banking sector outperformed the All Share Index (Alsi) by 180 percent. However, since the heady days of 1998 to date, banking stocks have underperformed the Alsi, resulting in most of the relative gains against the market being returned.
In the late 1990s, the banks' earnings justified the price out-performance. South Africa had opened up to foreign competition but no threatening foreign competition entered the banking sector. The market was also experiencing a listings boom with the technology craze offering easy money and good returns which all banks were capitalising on. Now, however, says Long, the rand's depreciation has hurt earnings; new listings are few and far between; and most equities are struggling to show strong earnings.
But, says Long, this underperformance by banks should not continue and he expects bank stocks to stabilise in the next two years.
Reasons are varied. For one, credit growth, which helps to boost banks, keeps increasing and has been on an upward trend since 1994. The level of household debt measured as a ratio against disposable income is coming down to safer levels after reaching all-time highs in 1998. But, while households may be getting more prudent with their disposable income, which should encourage savings, banks are being cautious and provisions for bad debts are at an all-time high.
Long says the banks also have more regulatory capital than in the last 10 years. There has been an increase in regulatory capital held by banks in the last five years, and capital adequacy now sits at about 12.5 percent. South African banks have also been profitable, achieving good returns on equity, which has also experienced an upward trend in the last decade.
Banks perform well when commodity prices are struggling and vice versa. Resource shares have benefitted from the depreciation of the rand and in the process have been the best shares on the market. However, in the last three months Standard Bank has outperformed Anglo's share by 55 percent indicating that perhaps the strong outperformance of resource shares is coming to an end. Long says that Standard's price-to-earnings ratio relative to the market's makes it a cheap buy right now.
Comparisons with international banks
Woes such as the savings and loan crises in the United States (US) and the bad debt crises in Japan are unlikely to occur in South Africa. The main catalyst in the US, Long says, was a change to banking regulations. Locally, banking legislation is not undergoing change.
Japan has suffered from structural problems resulting from inflated asset prices, cross holdings and deflation with significant bad debts still in its banking system. Once again, South Africa is not in the same boat.
Long says the main reason for banks having failed internationally relates to credit. At home, the problems experienced at Saambou and BoE relate to liquidity. Yet, liquidity issues have only caused two percent of international bank failures.