The South African Reserve Bank (SARB) said on Tuesday in its Bank Supervision Department's annual report that the South African banking system remained stable and banks were adequately capitalised during 2007, but that some indirect effects from the sub-prime crisis were observable.

Notably, the Department said it had requested a selection of South African banks to provide detailed reports on their exposure to the prevailing risks.

"The findings were that South African banks were not impacted directly, but indirect effects were observable, said the SARB.

"The wider impact of the global crisis on the local banking sector is still uncertain, but it is expected that as credit spreads widen and pricing for risky assets increases, the borrowing costs of banks will increase," it said.

Added to this is that the increase in interest rates, together with other adverse developments in the South African and international economic environments, contributed to the deterioration of credit risk ratios during 2007.

During 2007 credit risk ratios deteriorated with non-performing loans increasing from R18.8-billion at the end of December 2006 to R29.4-billion at the end of December 2007, representing an annual growth rate of 56.4 percent.

The SARB also pointed out that it remains concerned with some of the incentive schemes being used by banks.

Incentive schemes

“Financial-sector regulators and market commentators are again, as in previous years, questioning the appropriateness of banking institutions' incentive schemes,” it said.

Banks, however, maintained capital-adequacy ratios above the minimum requirement of 10 percent. The capital-adequacy ratio increased from 12.3 percent in December 2006 to 12.8 percent in December 2007.

Growth in the total balance sheet remained strong during 2007.

Banking-sector assets increased from R2075.3-billion at the end of December 2006 to R2547.0-billion at the end of December 2007, representing an annual growth rate of 22.7 percent (December 2006: 23.7 percent).

Profitability ratios thus remained strong. The return on regulatory capital amounted to 18.1 percent at the end of December 2007, compared with 18.3 percent at the end of December 2006.

The return on equity ratio decreased slightly from 18.3 percent at the end of December 2006 to 18.1 percent at the end of December 2007, while the return on assets ratio remained at 1.4 percent at the end of December 2006 and December 2007. The efficiency ratio of the banking sector improved from 58.8 percent at the end of December 2006 to 56.9 percent at the end of December 2007, owing to a continued increase in total income.

The average daily amount of liquid assets held in December 2007 represented 112.5 percent of the statutory liquid-asset requirement (December 2006: 111.2 percent).

Gross overdues increased by 56.4 percent, from R18.8-billion in December 2006 to R29.4-billion in December 2007, while gross amounts overdue as a percentage of total loans and advances increased from 1.1 percent at the end of December 2006 to 1.4 percent at the end of December 2007.

Throughout 2007, banks' average liquid assets exceeded the minimum liquid-asset requirement. The average daily amount of liquid assets held during December 2007 represented 112.5 percent of the statutory liquid-asset requirement, compared with 111.2 percent held in December 2006.

During the year under review, 18 new inspections, together with 24 inspections carried over from previous years, were undertaken.

The inspection of these 42 schemes was delegated to 16 forensic auditing firms. The Department said it had finalised five investigations during 2007. Two were reported to the South African Police Service (SAPS) Commercial Branch; two others were already under SAPS investigation; while the fifth scheme was found not to be conducting the business of a bank.

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