South Africa’s banking sector continues to be profitable, well-capitalised and able to withstand considerable adverse shocks, according to the South African Reserve Bank’s (SARB) latest Financial Stability Review.
The central bank said on Wednesday that the favourable macroeconomic environment had contributed towards improved asset quality, and provisioning against overdue accounts was considered adequate in aggregate.
The life-insurance sector was also generally healthy and earlier concerns over the sustainability of the business model of insurers were in the process of being resolved, it said.
Business confidence and confidence in the financial-services sector remained high and liquidations and insolvencies continued to show a downward trend.
However, the ratio of household debt to disposable income was at an historical high in December 2005.
“Although households are able to service outstanding debt quite comfortably, borrowers need to be aware that the benign environment may not continue indefinitely,” the central bank cautioned, adding that it continued to monitor the high level of household indebtedness.
Measures of residential property market activity stabilised at high levels and pointed to a cooling-off phase following above-trend growth rates in house prices, it said.
Mortgage debt (representing about 50% of total loans and advances) continued to increase strongly.
“Although overdue mortgage loans still declined in December 2005 [compared with December 2004], this trend appears to have subsequently reversed. Although not posing a threat to financial stability currently, lenders would be well advised to guard against complacency as experience has shown that the worst loans are made near the top end of the business cycle,” the SARB cautioned.
Looking at broader issues, the SARB noted that, underpinned by favourable macroeconomic conditions and accommodative macroeconomic policies, the global economy continued to expand strongly during the period under review, albeit at a slightly more moderate and possibly more sustainable pace. This supported stable macro-financial conditions by reducing uncertainty and promoting confidence in financial markets and institutions.
“Notwithstanding these favourable outcomes, a number of key risks to the global economic and financial stability outlook remain. These include high and volatile energy prices, global imbalances and abnormally high residential real-estate prices in certain areas. In addition, the abundance of global saving and the associated search-for-yield, as well as the possible mispricing of risk as a result of an extended period of favourable economic conditions and relatively low levels of volatility in financial markets, are causes for concern.
“This is particularly true for investment in emerging-market economies where credit spreads narrowed further. Although concerns regarding a possible reversal of capital flows and a damaging correction in financial asset prices [especially following interest rate increases by the United States Federal Reserve] did not materialise, a sudden change of sentiment of investors towards emerging markets remains a risk,” the SARB stated.
It added that the outlook for the Southern African Development Community countries broadly continued to improve, benefiting from general macroeconomic stability, stronger fundamentals, more stabilising policies in most countries and improved prospects for the global economy.
But it noted: “The HIV/Aids pandemic, high unemployment, poverty, conflict and civil strife remain risks for the region, as do imprudent economic policies in some instances.” — I-Net Bridge