Too many banks may cut the bottom line

The impending entry of new banks including Discovery’s and Tyme’s will reduce profitability and may increase risk in the sector, says Kuben Naidoo, head of the Prudential Authority.

Naidoo, who is also deputy governor of the SA Reserve Bank, said the regulator, which oversees the stability of all of the country’s financial institutions, was trying to introduce more competition and lower barriers to entry. At the same time, the authority wanted to maintain stability and ensure a sound financial system.

“All of this may lead to lower profitability, and that could mean more risk and more instability. That means we need to be on top of our game,” he said in an interview with Business Day.

The country has not suffered a banking crisis since the early part of the past decade when a run on small banks culminated in the failure of Saambou in 2002.

SA’s five largest retail banks – FNB, Standard Bank, Nedbank, Absa and Capitec – account for 85% of the country’s more than R5-trillion banking sector.

Their return on equity has remained broadly stable between 13.3% and 25% over the past five years, according to Bloomberg data.

Naidoo said he would like to see heightened competition lead to “a better service to customers at a lower price”.

This included innovation that could make inroads into the 23% or so of the population that remained unbanked.

Three new banks are in various stages of launching. Patrice Motsepe’s TymeBank is in the process of ramping up its presence at partner Pick n Pay stores.

Michael Jordaan’s Bank Zero, along with Discovery Bank, are both expected to launch in the new year.

In addition, a revitalised African Bank under chief executive Basani Maluleke is poised to compete aggressively for market share with a refreshed product offering.

The Prudential Authority has added a number of tools to enhance supervision and encourage competition, starting with the imminent enactment of deposit insurance, which will guarantee retail deposits up to R100,000 per client per bank.

It expects this to give depositors peace of mind in placing money with some of the newer banks. In addition, powers granted under the new Financial Sector Regulation Act to the authority allow it to supervise all financial institutions, not just banks, which means it now has a full view of financial institutions’ balance sheets.

Recent agreements signed with the Financial Intelligence Centre, National Credit Regulator and Financial Sector Conduct Authority have also improved information flowing to the Prudential Authority.

“I think we are prepared and ready,” Naidoo said.

The Reserve Bank may in time also consider introducing account “portability”, which would allow customers to move their numbers across banks in the same way as done with cellphone numbers.

All of this may lead to lower profits, and that could mean more risk and more instability