Targeted banks are sitting ducks
Transformation is a particular challenge because of strict regulation
South Africa’s banks have a target on their backs — at least, that is the feeling of people in the industry. Depending on which side of the debate you sit, the reason is they took a stand against the Gupta family by closing their accounts and then undermined the Cabinet by refusing to bend to pressure to reopen them.
Or it is because a few big banks dominate the sector, have failed to transform sufficiently and are ripe for change — even if it needs to be forced upon them?
Earlier this week the ANC’s lekgotla made it clear that it wants the government to “develop and implement a programme for the transformation and deracialisation of the highly concentrated financial sector in the interest of the vast majority of the country”.
This came after the chairperson of Parliament’s standing committee on finance, Yunus Carrim, told Business Day that if the banks did not transform “it will be done for them through popular action that will reduce their prospects of having an effective say”.
The committee will be holding hearings on this question in March. Carrim would not give detailed examples of what he meant by transformation, saying that this would pre-empt the hearings.
The most common criticisms include the dominance of the biggest five banks — Barclays Africa (or Absa), Standard Bank, First Rand, Nedbank and Capitec — and the difficulty new entrants to the market face.
The question of outright black ownership is another, given that a number of high-profile industry empowerment deals have matured in recent years, seeing black shareholding diluted.
The difficulty black entrepreneurs have in accessing money to start and run their businesses is also a common theme.
It does not help that all the banks, bar one, have white chief executive. Even there, Standard Bank’s Sim Tshabalala, has a co-chief executive in Ben Kruger.
A state-owned bank is often touted as the answer to a number of these issues and the ANC lekgotla again emphasised the need to fast-track the licensing of Postbank — something that, after years of languishing, has been given renewed momentum by the appointment of Mark Barnes as the Post Office’s chief executive. Barnes and Telecommunications Minister Siyabonga Cwele said in July last year that the licence will be awarded within a year.
Although there are legitimate problems, industry players argue the solutions are not simple.
There are particular peculiarities about ownership, given the requirements of international banking regulations such as Basel III, an industry insider said.
South Africa’s largest banks are integral to the country’s financial system and they pose a high level of systemic risk should any of them go under.
As part of the Basel III regulations, they must comply with stringent capital requirements, including holding tier one capital, essentially shareholder equity and retained earnings that can be used to absorb losses during an adverse event and keep the bank running.
Typically black economic empowerment (BEE) investors have not had the capital to invest. Generally, BEE deals have been financed by debt. In the case of banks, this would place these shareholders under enormous pressure in the event of a financial or banking crisis. by a heavily indebted entity, there is the risk that the regulator or the taxpayer will have to step in if there is a call on capital, Meintjes said.
The regulatory pressure on banks notwithstanding, there has been much debate over whether banks and other industries such as mining should be allowed to operate according to a “once empowered, always empowered” principle.
But the industry might be given some leeway on this. Last year, the financial sector released its draft financial services sector codes of good practice. It is intended to replace the existing sector code and bring it in line with changes to broader empowerment legislation and the generic codes of good practice.
The new code, according to Cas Coovadia, the managing director of the Banking Association South Africa, views ownership deals as “done” and, in line with global trends, banks are primarily owned by institutional funds rather than
South Africa’s banking regulations and the sophistication of its financial markets are world-class, he said, and having fewer large bank makes regulation somewhat easier.
“There is a balance to be struck between competition and regulation,” he said.
In a relatively small country, a fragmented banking sector, with a large number of banks, increases the regulatory burden and heightens the potential for system risk.
This “four-pillar” policy was recognised by the Reserve Bank, according to Coovadia. It is designed to increase competition by limiting mergers between the four largest competitors.
“Within a financial stability mandate, the SARB [South African Reserve Bank] and national treasury must ensure that these banks are sound and that a failure of one of them will not bring down the financial system at the cost of the fiscus,” he said.
But this does not limit entrants to the market and does not prevent other banks from growing into large commercial ones.
According to Coovadia, regarding foreign ownership, the interest displayed by global banks “demonstrates their confidence in the stability, soundness and integrity of banks in South Africa”. The Reserve Bank also plays a significant oversight and decision-making role and is cautious about the level of foreign ownership.
These complexities notwithstanding, the problem of transformation, particularly in the wider financial services industry, remains an issue for many.
The Financial Sector charter Council has failed to release updated figures on transformation in the sector since 2014. But the employment equity commission has revealed that, in finance and business services, white men still dominate almost all occupational levels.
Asief Mohamed, a representative of the Association of Black Securities and Investment Professionals on the council, is fiercely critical of the failure to assess the industry’s performance fully, saying that the previous reports have been a “whitewash”.
The council did not respond to emailed requests for comment.
The legitimate debate over transformation has also been muddied by the war being fought in Parliament over the Financial Intelligence Centre (FIC) Amendment Bill. The likes of the Progressive Professionals Forum, headed by Mzwanele Manyi, claim it is a tool to target black business people.
But the Bill is important to perceptions about South Africa’s banking industry, said Meintjes. “South Africa is an open economy, and we are dependent on foreign capital,” he said.
It is important for South Africa to maintain high standards to ensure that it remains attractive as an investment destination.
There is increasing criticism of the emphasis placed on the opinions about ratings agencies, said Meintjes, but South Africa borrows from international capital markets and has to meet their expectations, notably having an appropriate credit rating.
“We must stick to the rules because we have borrowed from the rest of the world.”