Bank­ing sec­tor

Finweek English Edition - - INVESTMENT -

Con­tin­u­ing with un­der­stand­ing the nu­ances of the dif­fer­ent sec­tors, let’s look at the bank­ing sec­tor this week. Let’s fo­cus our at­ten­tion on bad debts or im­pair­ments, as the in­dus­try calls them. Some cus­tomers not pay­ing back loans is just a part of be­ing a banker; the real is­sue here is how much is not paid back. This is the im­pair­ment ra­tio and it will vary wildly depend­ing what part of a bank we’re look­ing at. For ex­am­ple, un­se­cured lend­ing such as credit cards typ­i­cally has a high im­pair­ment ra­tio while home­loans and other as­set-backed loans (such as ve­hi­cle fi­nance) are as a rule lower as there is a di­rect hit to the cus­tomer if they de­fault (los­ing their home or car). We will also see a dif­fer­ence be­tween cor­po­rate and in­di­vid­ual im­pair­ment lev­els.

We need to look for trends within the dif­fer­ent sec­tions but also un­der­stand how the bank de­fines ‘im­paired’. Some banks will make pro­vi­sion for a bad debt af­ter three months of non-pay­ment, oth­ers maybe five months, and this can dis­tort the fig­ures when com­par­ing the dif­fer­ent banks against each other. As a rule, the process of when a loan is im­paired is de­tailed in the an­nual re­port.

The next stat is my favourite for banks and the first I look at when re­sults are pub­lished – the cost-to-in­come ra­tio (some­times re­ferred to as an ex­pense ra­tio). With the four large banks it is in the mid­dle f ifties, mean­ing that from ev­ery rand that they re­ceive in in­come costs eat up some 55c. This num­ber was head­ing down to the low fifties be­fore the cri­sis of 2008/09 but now seems stuck around the mid-fifties. Again here the trend is im­por­tant and we can also see how the dif­fer­ent banks mea­sure up.

An­other im­por­tant set of num­bers is the cap­i­tal ad­e­quacy ra­tios. Bank are re­quired by the reg­u­la­tors to keep a cer­tain amount of cash on hand and this num­ber is set to in­crease with the new Basel III reg­u­la­tion com­ing into ef­fect in 2018 (and cur­rently ramp­ing up). If a bank is short on its cap­i­tal ad­e­quacy ra­tios, it will have to start hoard­ing cash rather than us­ing it to grow its lend­ing books. How­ever, lo­cally, all the big banks are well ahead of the re­quire­ments so it is not a worry as things stand.

Non-in­ter­est rev­enue is an­other im­por­tant num­ber to look at. Tra­di­tion­ally banks made money by tak­ing de­posits at one rate and then re­lend­ing the money at a higher rate the dif­fer­ence be­ing their profit. They also would lend, for ex­am­ple, R100 for ev­ery R10 they have as a de­posit (this is their cap­i­tal ad­e­quacy ra­tios), but banks have been push­ing for more rev­enue from other ar­eas such as fees, com­mis­sions on other re­lated prod­ucts and of course penal­ties. Lo­cal banks have been push­ing this num­ber higher as they’ve been fo­cus­ing on it, in one sense a good idea (cross­selling prod­ucts to earn the com­mis­sions) but they have to be care­ful about the fees and penal­ties.

We can of course do all the nor­mal ra­tios such as rev­enue per staff mem­ber, per branch and even per ATM. As al­ways, staff, branches and ATMs are a cost but also a ser­vice is­sue. Too few staff could mean lower ser­vice lev­els that could re­sults in the bank los­ing cus­tomers.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.