The high level of concentration in the banking sector is not unique to South Africa, and the domination of the South African industry by four banks is in keeping with other middle-income emerging markets, Penelope Hawkins of FEASibility said on Tuesday.
At the Trade & Industrial Policy Strategies conference, Hawkins said other emerging markets which had only four banks with a more than two-thirds market share included Brazil, Chile, the Czech Republic, Greece and Turkey.
Botswana, Malawi, Mauritius and Namibia had only two banks with a more than two-thirds share, while in Israel, Mexico and Zambia, three banks exceeded this threshold.
Based on the DI 900 returns (monthly returns submitted by the commercial banks to the South African Reserve Bank detailing the banks’ assets and liabilities), the share of the top four banks in the corporate market segment amounted to 68,5%, with Investec and other banks making up the rest.
“At the end of 2002, it was estimated that the top four accounted for 85% of installment sales credit within the banking industry, and over 92% of mortgages,” Hawkins said.
Several indices may be used to measure competition and concentration in a sector. The most widely used index in the field is the Herfindahl-Hirschman Index (HHI). The HHI accounts for both the number and relative size of players in the system and is therefore preferred to other measures of concentration.
It is most commonly calculated by summing the squares of the market shares, so that if the industry consists of a monopolist then the HHI = (100) squared = 10 000, or if it is a contested market with 100 firms, each with a 1% market share, then the HHI = (1) squared x 100 = 100. The higher the value, the less competitive the market appears to be.
The South African Reserve Bank banking supervision department publishes the HHI index for the registered banks, calculating the HHI in the conventional way and then dividing by 10 000.
Concentration levels become a concern when the index reaches a level of 0,18. The HHI declined steadily from 0,170 in 1995 to 0,136 in 1998, both as a consequence of greater foreign participation in the local banking industry and the entry of niche players. From 1998 to 2001 the HHI remained stable, before deteriorating in 2002.
When the Nedcor-BOE merger is taken into account, the HHI deteriorated to 0,175last year, which represents pre-1995 levels. This represents an increase of 33,4% in the HHI from 2001 to last year. This level is only slightly below the concentration threshold.
However, it may well be more appropriate to evaluate levels of concentration by sub-market rather than by firm. As is suggested by some of the market share ratios discussed above, when evaluated by product, higher levels of concentration are evident than when the firm analysis is applied.
“A rise in the concentration of the banking system, as seen in the South African market between 2001 and last year, is associated in the literature with an increase in the market power of banks,” Hawkins said.
Hence a higher concentration in the banking environment is associated with higher margins between lending and deposit rates and higher levels of profits earned by banks.
Most data for European banking systems indicate a positive and significant relationship between concentration and financial margins.
“An alternative argument suggests that banks will be more profitable because they are more efficient, and that because they are more efficient they will achieve a larger market share,” Hawkins said.
This suggests that the relationship between market concentration and profitability is not unidirectional.
Regulation can also restrict the entry of new banks to a market, enhancing the opportunity available to existing banks to take excessive profits. In general, if a market is contestable, there will be less opportunity for banks to generate excessive profits or to have unduly wide margins.
Market share in the insurance industry appears to be less concentrated than in the banking industry.
At the end of 2001, the latest year for which there is data, Old Mutual and Sanlam made up 26% and 18% of the long-term insurance industry respectively.
There are four firms with just fewer than 10% market share — Liberty life, Forbes Life, FirstRand and Fedsure. There has been relatively little change in these relative shares since 1994.
The reinsurance market segment is serviced by five players, of which four are dominant. By contrast in the short-term insurance market, there are three large players — each with a market share of less than 15%: Guardian National, Santam and Mutual & Federal. — I-Net Bridge