South African Banking Sector Indicators — May 2020
- Balance Sheet Size
The South African Commercial Bank Balance Sheet contracted by 75 billion rands from 6.61 to 6.54 trillion rands. The contraction is probably consistent with the reduction in nominal GDP, but we cannot read too much into the data as it comes after five months of straight month-on-month expansions.
The contraction of 1.14% month-on-month is not very significant in these COVID times. There are no signals of inflationary pressures mounting.
The Central Bank Balance Sheet also decreased but not as much as the Commercial Banks Balance Sheet. In my opinion the decreases are normal. They do not signify any fundamental changes to the economy.
Both the central bank balance sheet and commercial banks’ balance sheet are well managed and under control, even though the central bank appears to have liquidated 34 billion rand worth of gold, SDRs and foreign currency, possibly to help temporarily finance the corona virus budget whilst the central government arranges for a loan from international financial institutions.
2. Balance Sheet Structure
Regarding the balance sheet structure, there has been a noticeable change in the composition. The proportion of the balance sheet taken by deposits is increasing, from 67% in March to 68% in April to 69% in May. Naturally, we can forecast it to be 70% in June.
Whilst the change in the structure is not a pertinent issue at the moment, we have to keep track of the changes and monitor other items of the balance sheet for decreases, especially equity and foreign currency funding. The bulk of the banking sector funding comes from deposits but if that component is too high it raises dis-intermediaton exposure and makes a bank run very difficult to stop once it starts.
3. Deposit Base
The deposit base is expanding month after month. This can be viewed as in increase in the monetary base. The increases are still modest and there is nothing to worry about as yet.
4. Foreign Currency Funding
There was a sharp decrease of 34 billion rands from April to May. This means foreigners are taking their money from South Africa which is understandable given the risk attached to emerging markets in these corona virus times. Emerging markets are viewed as riskier than established markets. The general view is that emerging markets will suffer economic damage more than the developed markets. Declines in foreign currency funding could be a blessing in disguise for commercial banks because it reduces currency risk. A complete view will compare the decline in foreign currency funding with the changes in foreign currency assets. Ideally these two items should move together.
5. Loans and Advances
I was expecting an increase in loans and advances. However, there is a decrease of 54 billion. From March to April there was also a decrease of 9 billion.
Conventional wisdom confuses a mind into thinking that banks should be increasing their loans and advances in these times as more clients are liquidity-strapped and need funding.
However, banking is all about risk management. Some clients that were sound before corona virus are now unable to repay any debt. Several businesses are not going to make it through to the other side. Default risk is probably at an all-time high and as such banks cannot offer new loans to everyone who needs it or everyone who qualified before corona virus. In fact, in these times banks would be limiting their NPL exposures by refusing to roll over certain loans and applying stricter rules for lending.
This comes at a time when the economy needs funding. It is a paradox.