OPINION | Why South African banks stack up well | Business

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The investment case for SA banks remains especially compelling. A combination of strong balance sheets and cheap valuations could provide investors with an attractive entry point for generating solid long-term returns, writes Sean Neethling.

The investment case for SA banks remains especially compelling. A combination of strong balance sheets and cheap valuations could provide investors with an attractive entry point for generating solid long-term returns, writes Sean NeethlingThe failure of three US regional banks as well as the collapse of global investment bank Credit Suisse has sparked fears of a looming global banking crisis in the first half of the year.

Aggregate levels of risk-taking are significantly lower than in 2008, with bank balance sheets holding stronger capital adequacy, liquidity, and leverage ratios. There does, however, appear to be pockets of idiosyncratic risk building up across the global banking sector, the most notable of which is in US Regional Banks where liquidity and credit metrics are showing some signs of early stress.

These interventions are exceedingly important to maintain confidence in the banking system, as they signal both the willingness and ability of central banks and corporates to step in when needed. If investors lose confidence in backstop measures to protect the integrity of the system and perceive slack risk controls to be more endemic, then a more widespread liquidity and potential credit crisis could follow.

The trends in SA commercial banks suggest that the domestic banking sector has not experienced any meaningful squeeze on either deposit or lending growth. Banks are also holding capital and liquidity buffers well ahead of mandatory regulatory requirements. Another positive local development is that the South African Reserve Bank has proposed a deposit insurance scheme to improve the ability of the banking system to manage shocks. While the regulator has shown a willingness to intervene to protect depositors when system integrity is compromised , the commitment to advancing a more formal framework further enhances the SARB’s credibility as a leading global central bank.

Bank balance sheets are in especially good health. The main SA commercial banks are currently operating with capital adequacy levels well in advance of regulated minimum requirements which provides a strong buffer against potential operating losses. The graph below shows these ratios for FirstRand, Standard Bank, Absa and Nedbank.

 

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