Foreign invasion forces Big Four to change tactics
The arrival of a flood of foreign banks in SA has changed the country's corporate banking world. Clients have never had it so good as foreign banks eat into local banks' market share. CIARAN RYAN reports
Loans are being doled out at wafer-thin margins - as low as 0.25% in some cases. A survey by Price Waterhouse on foreign banks in South Africa shows that the foreigners, backed by huge global balance sheets, are less worried about domestic banks than are domestic banks by the arrival of so many new competitors.
It is generally acknowledged that the market cannot support so many banks and a shake-out is now widely predicted. So, too, is a merger between two of the Big Four South African banks - Absa, Standard, First National Bank and .
Nedcor Most of the foreign banks are targeting the top 100 corporations, a market now so over-banked that several domestic and a growing number of international banks are moving into the mid-sized corporate market where, although higher risk, margins are more generous. Among the foreign banks showing interest in the mid-sized corporate market are New Republic Bank (controlled by Dato Samsudin) and newly formed TA Bank - both Malaysian controlled.
The squeeze on margins at the lower risk top end of the market has forced domestic banks to eliminate duplications and focus on chosen niche markets, according to an analysis of the banking sector by Mark Young, banking analyst with IBCA South Africa.
Writing in the 1997 Financial Markets Handbook, Young says this competitive attack from abroad resulted in many of the larger domestic banks entering markets traditionally dominated by the small and medium-sized domestic niche banks.
Total banking assets grew by 18.4% in 1996 to R472.1-billion, while assets under foreign control nearly doubled to R18.3-billion. The banking sector remains dominated by the Big Four, but their share of the market declined from 82.2% in 1995 to 80.6%. Absa is the largest, with a 26.5% market share, followed by Standard (21.56%), First National (16.8%) and Nedcor (15.8%).
"Growth in assets under foreign control was significantly higher than the market average but did, however, fall sharply between the first (38.5%) and third (7%) quarters," says Young. "This is probably a reflection of the increased uncertainty and tight liquidity conditions in the financial markets at the time."
The majority of foreign branch assets are located in foreign currency loans, the inter-bank market, corporate loans and investments in the capital markets. This tends to be low risk margin business and generally of a short-term nature.
Foreign banks' share of the foreign currency loans market has grown from around 17% to 35% over the last 18 months - at the expense of the Big Four.
Foreign currency loans attributed to the foreign branches more than doubled during 1996 to R5.1-billion, with these banks having gained market share from the Big Four. In the inter-bank market their contribution to market assets rose from 20.5% to 27.2% during the year.
Foreign banks have been able to leverage their lower overhead costs by offering finer interest rates, while the introduction of money market funds should exert additional pressure on rates as commercial banks are forced to pay more for their funding.
"This has placed pressure on South African banks to reduce their high cost ratios and focus on becoming less reliant on interest revenues, with different avenues of fee and commission-related income being explored," says Young.
Restructuring of the domestic banking sector is complicated by their heavy investments in branches and information technology, and the pressure being exerted on the banks to extend banking services to the poor. Most are targeting a 60% cost to income ratio (Nedbank is already there).
Cross subsidisation of banking services is being squeezed out of the system as smaller niche banks target the more profitable markets. There seems to be little interest so far from foreign banks in the retail banking sector (catering to the man in the street) because of the high costs of maintaining branch networks.
All in all, says Young, 1996 was one of the more challenging years in South African banking history. A period of consolidation is likely to follow, starting with the merger of NBS Bank and Boland Bank, which gives the two a national distribution and wider range of products which will compete directly with the Big Four.
The merger of smaller niche banks such as Citizen Bank, Future Bank and Bophuthatswana Building Society will ensure a better critical mass and wider product range. Other niche players have increased their capital bases to ensure they remain competitive. Competition will get even hotter as non-banking institutions such as Pick 'n Pay and other retail chains start to offer banking services. Under conditions such as these, a merger between two of the Big Four makes sound sense.