SA banks strong, but the global ground looks rocky
Looks at what could threaten the financial services sector
DESPITE assurances all round, it would be foolish to believe that SA's financial services sector will emerge unscathed while the world's top bankers and politicians scurry to limit the effects of the global financial crisis and major financial institutions are crumbling, leaving whiz kids in London and New York fearing for their jobs.
To date, the only hitch for an SA bank has been Standard's exposure to Russia, estimated at $100-million at most, which it should be able to absorb. Rumours about trading losses at Brait prompted it to get the Reserve Bank to examine its books and certify that it was financially sound.
The sharp drop in the financial index, although much in line with overall trends, clearly demonstrates investor sentiment, with analysts saying they have adjusted their financial services company forecasts down. But apart from faint murmurings of increased bad debts or trading losses, the feeling among economists, industry regulators and analysts is unanimous that SA's financial services sector is sound - more so than in most developing countries.
SA does have a few things in its favour. As a long-term outcast from the global economy, its financial services sector has not had much chance to face exposure to risk elsewhere.
The sector is highly regulated and traditionally conservative, and there are rules limiting the extent to which most sectoral players can be geared. But there are also many financial services companies which are market-driven and highly geared, and which could be under strain or even at risk of collapse.
SA has recently become the playing field for over 70 foreign financial services institutions which, together with the already established local institutions, are fighting for a dwindling number of business opportunities. Surely not all can survive.
The global crisis has already seen some of the world's largest and most well-respected financial services groups flounder. The financial world was shocked when top-notch US-based hedge fund Long-Term Capital Management required a $3.5-billion rescue operation when its total exposure of $200-billion brought it to its knees. In the aftermath, Mathis Cabiallavetta, the chairman of Europe's largest bank, UBS, and three of his top executives left their jobs as UBS was hit by a $700-million charge for exposure to the US fund.
Barclays has reported £250-million losses in Russia, and various other major banks around the world have been significantly humbled by their emerging-market and bad-debt experiences. Moody's Investors Services adjusted its rating outlook for five large European banks downward, and the world's political and financial leaders have been locking heads to tackle the financial crisis. These are just a handful of the major crises to emerge over the past few weeks alone.
They also prove that the Asian crisis has clearly spilt over into the world, leaving no country unaffected.
Econometrix director and senior economist Michiel Bester says Asian countries in financial crisis are affected on two fronts - currency problems (with related balance of payments problems and enormous foreign debt) and a weak banking system. "In SA we had a currency crisis but not a banking crisis, so we are distinctly different."
Bester says one cause for concern is the consistent growth in private credit which exceeds the growth in GDP. "For the past four to five years, the growth in credit extended by banks to the private sector has been in excess of the growth of nominal GDP by 5%. Should this worsen or continue for too long - along with slow economic growth, a fall in inflation and high interest rates - the financial sector will be vulnerable."
A spokesman for the Reserve Bank's bank supervision department says what is of concern is "the serviceability of borrowers' debt, given a prime rate of 25.5%". If these conditions prevail, "it could adversely affect the asset quality of banks". But he adds that banks are actively managing the situation and "a renewed supervisory focus" has been placed on this issue.
Gerry Anderson, who heads the Financial Services Board's financial markets department, says the FSB has certain ways of measuring the stability and position of members, which include the JSE, Safex and the bond exchange.
He says much depends on risk management. "Barings fell because of internal risk management and our mini-Barings, Sechold, fell for the same reason. It is, of course, very difficult to say that all our members have excellent internal controls."
Nedcor Investment Bank chief economist Dennis Dykes says that ever since the markets fell by 40%, "people have been waiting to see the blood, especially where people have taken aggressive positions. You may find one or two smaller players taking a knock, but you are most unlikely to see any systemic danger.
"In global terms, the SA banking sector is well-placed, even by developing country standards," he says. "Obviously there are some exposures to countries like Russia, particularly those operations with affiliates or branches outside SA, but I would be surprised if they were substantial."
But while the economists and regulators seem to believe it cannot happen here, there is another school of thought. If it can happen to the likes of UBS and Long-Term Capital Management's John Meriwether - the Wall Street legend otherwise known as "master of the universe" - it can happen in SA.
A source in the financial services sector says the big risk factor is people trading the market on borrowed money - and there are many such people. "The rule is that you don't play the stock market on borrowed money, but you can play derivatives and don't even need to borrow - they facilitate it for you.
"Risk is largely related to gearing, as is evident in the US where hedge funds have been allowed to gear themselves to all kinds of heights. There are also many SA institutions using various fancy leveraged trading strategies."
Another source says that in a rapidly declining market, traders who have made the wrong call could take highly risky positions to trade out of the problem, and this is often where the bloodbath starts.
Yet another adds that in this kind of market, a good loan six months ago is not necessarily good now - risk exposures can change suddenly. This means that any financial institution, no matter how sound, could quickly find itself in trouble.
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