The dearth of options available to global investors in government debt may end up working in South Africa’s favour as Moody’s continues to delay action on the country’s last remaining investment-grade rating.
‘South Africa’s banks are feeling the pinch’: Credit downgrades, state capture and sluggish growth
Political uncertainty and ratings downgrades have affected South African banks and they haven’t seen the worst of it yet, says Banking Association South Africa managing director Cas Coovadia: “When [banks] go out to raise money and fund investment and do lending, the cost of that money will be more and it also becomes scarcer. That has an impact on the cost of borrowing to consumers, and the banks may not raise enough to on-lend, and this in turn impacts economic growth.”
Official statistics released in June show South Africa entering its first recession since 2009. Under the economic circumstances bank performance has been reasonable, says Coovadia, “but on the back of relatively low volumes of business.”
He adds: “We have a constrained economy where unemployment is high, jobs are scarce, income is not keeping up with expenditure and people are not borrowing too much. Those that have borrowed are finding it more difficult to service debt, and banks are feeling the pinch.” He says banks are showing some signs of stress and that the ratio of non-performing loans to total loans is around 4% and rising.
Coovadia refuses to comment on the government’s criticisms of the industry. These include calls for banks to explain their refusal to do business with the politically connected Gupta family and a recent decision by public protector Busisiwe Mkhwebane that Absa pay back R2.3bn ($171m) its predecessor Bancorp received as part of an apartheid-era bailout.
He does say, however, that the latter is not in the public protector’s purview, and that banks that looked at Gupta-linked accounts and suspected irregular transactions were legally bound to report these and act accordingly.
BANKING UNDER ATTACK
The independence of the Reserve Bank also came under threat when Mkhwebane said its mandate should be changed – a comment she has since rescinded. The association commented at the time on this, saying Mkhwebane had gone beyond her mandate.
“We will do everything
to publicly protect the independence
of the [South African] Reserve Bank”
“We think it was, in our view, a nefarious attempt to impact on the independence of the Reserve Bank, and we will do everything to publicly protect the independence of the Reserve Bank,” Coovadia tells The Africa Report.
He links it to a “broader attack on the industry”, which he says is occuring “by forces bent on corruption and state capture”. Outlining his association’s position, he says: “We have undoubtedly taken the view we need to be in the public space to position the debate and to get the facts out.”
Coovadia emphasises that banks are not under threat of collapse or failure. “They are well capitalised, liquid and well regulated, so there is no systemic issue there […]. What it does do is it forces us in some ways to switch focus from the business of banking to protecting the industry. We need to work in the national interest but remain sound, profitable institutions, and we will maintain that.”
African National Congress treasurer general Zweli Mkhize has called on the financial services sector to fast-track economic transformation, and this is an area where banks may be justifiably criticised. Coovadia says the association has made a submission to parliament, and, “if you look at banks’ performance against the financial sector charter [which prescribes transformation targets] they have not performed badly”.
Coovadia says it is difficult for banks to meet black ownership targets as shareholders need to have deep pockets, which is why banks globally are owned by institutions. Admitting that transformation of the sector could be faster, he says it should be enabled in a way that facilitates growth in the industry.
From the September 2017 print edition