A poor savings culture is contributing to the difficulties facing local banks in meeting some elements of the pending Basel III regulations.
But are local banks their own worst enemy when it comes to attempts to get South Africans to save with them, particularly in the short term?
The answer is, in part at least, yes, according to Sanlam chief economist Jac Laubscher. Because of the extremely low or zero interest rates offered by many banks to ordinary customers, saving is not attractive.
He said banks appeared to have concentrated on creating many attractive credit offerings, but placed insufficient focus on ways to save.
Instead, South Africans put their savings into other parts of the financial services sector, dominated by long-term insurers, asset managers and institutional investors.
These institutions, along with companies’ savings, contributed to the wholesale funding pool. The local banking sector is heavily reliant on funding from wholesale deposits, predominantly by companies and other financial institutions.
In an economic commentary note released by Sanlam last week, Laubscher said that deposits by companies and financial institutions accounted for 63.3% of total deposits, retail or household deposits made up 23.3%, nonresidents contributed 3.5% and the balance came from other deposit types.
This structure of deposits was a challenge for the ability of local banks to meet Basel III requirements.
“It is this aspect that is unacceptable in terms of Basel III liquidity requirements,” Laubscher said.
“In terms of these requirements, South African banks must change their funding base from wholesale deposits from companies and other financial institutions, to retail deposits from households as a bank could experience serious liquidity problems should a few big clients withdraw their deposits simultaneously.”
Basel III will require banks to meet two key ratios: the liquidity coverage ratio and the net stable funding ratio.
The liquidity coverage ratio is aimed at ensuring that banks have a stock of high-quality liquid assets that can meet a 30-day cash outflow in the event of a crisis and a run on a bank.
The net stable funding ratio is aimed at ensuring banks have enough long-term stable funding to protect against a protracted stress period of up to a year.
Laubscher said that banks should increase the interest rate on households’ deposits and make it more attractive for them to invest at a bank instead of in a money-market fund, which was deemed a wholesale deposit.
The banks also undermined the precautionary motive to save by providing products such as access bonds, which gave people ready access to the equity in their home loans, mortgage bonds and vehicle financing without deposits, and very low or no interest on savings accounts.
The government has also played a negative role by offering a wide social safety net that undermines individuals’ motives to save for unforeseen circumstances or short-term financial needs.
Capitec, a relatively new arrival on the banking scene, is providing better interest rates on retail deposit accounts. It comes as little surprise then that its market share of total deposits in the country has grown rapidly over the past five years.
Although Capitec’s share of total deposits is still small compared to the big four banks (Absa, FNB, Nedbank and Standard), its growth rates by some estimates have been as high as 1600%.
Capitec’s deposits are predominantly retail account holders.
The Reserve Bank has introduced a committed liquidity facility to help the banks to meet the liquidity coverage ratio.
But the net stable funding ratio poses additional complications as banks traditionally use short-term deposits to fund long-term loans, creating a funding mismatch. The regulations are aimed at ensuring banks have enough high-quality long-term funding and sufficient funds available to meet the needs of depositors.
Laubscher is not convinced that these elements of the Basel III regulations are entirely appropriate for the South African context, given the strong capitalisation of local banks, and the structure of the local funding model. Despite the important source of funding that other financial institutions represent to the banking sector, economists agree that this is not clear evidence of a booming savings culture.
Laubscher said the local savings pool had to be grown and South Africans’ low propensity to save had to be addressed.
Stanlib economist Kevin Lings agreed and said that, ideally, South Africa’s banks required a better mix of both long-term and short-term deposits, and a better mix of corporate and institutional deposits and retail deposits.
But this was unlikely to change unless ordinary South Africans saved more, Laubscher said.
A bid to grow the economy
Households’ net savings levels were roughly estimated at less than 2% of gross domestic product, and total savings was an estimated 16% of gross domestic product, which was dominated by corporates.
Similar emerging markets had achieved average savings rates of roughly 26%, he said. But when this average was weighted to account for economies such as China, the figure increased to an average of 34%.
As South Africa gears up to big infrastructure build targets in a bid to grow the economy, the country needed to achieve investment levels of around 25% of gross domestic product, said Lings. This means domestic savings must rise to similar levels. As it currently stands, given the country’s current-account deficit South Africa was reliant on foreign savings in the form of foreign investment inflows, he said.
Chief investment officer of Cannon Asset Managers Adrian Saville said that South Africa’s life industry was highly competitive by global standards and, if it was removed from the market, banks would be the direct recipients of most of these funds.
But the issue was not what kind of impact they had on the ability of banks to meet Basel III requirements; the issue was “simply that the local savings pool is too small”.
A contributing factor to the problem, Saville said, was that policymakers had not done enough to create an incentive to save. Tax structures provided too little incentive for people to save and were “not a serious policy initiative”.
According to the Association for Savings and Investment South Africa, which constitutes most of South Africa’s investment fund companies, life insurance companies, investment managers, multimanagers and fund supermarkets, the total assets held in the sector amounted to about R4.2-trillion.
The association’s chief executive, Leon Campher, said that, although the industry was large, South Africans could do more to save.The industry was looking at ways to stimulate savings, including by offering more innovative products and increasing financial literacy among consumers.
He said the industry had been brought on board to help banks to address some of their long-term funding challenges under Basel III. In September, revised regulations came into effect, permitting investment funds to invest in more long-term bank debt, in a bid to address the mismatch in their funding.
A word from the banks
South Africa’s ratio of savings to disposable income has been in negative territory for some time, reaching levels as low as –1%, said Absa.
But it is not because of what the banks offer retail depositors, it said. There is no “one size fits all” solution to saving and there are many different investment options. Rather, what is needed is a cultural change to improve the savings behaviour of South Africans.
Because of low personal savings, combined with the well-developed broader financial services sector, a large proportion of retail funding reaches banks through the asset management sector, Absa said.
In South Africa this funding is not necessarily more risky, owing to the closed nature of the economy and because the underlying investments were of a retail nature.
Absa said the Reserve Bank’s announcement that it will provide a committed liquidity facility has given clarity on the way forward.
The availability of long-term funding is limited in South Africa because of a small securitisation market and a relatively small market for corporate debt, according to the bank.
There is also no “covered bond” market – a secured funding vehicle – that is used extensively elsewhere in the world to provide banks with a cost-efficient form of funding.
Retail and commercial funds are typically provided on a short-term basis, Absa said. But, in practice, a large proportion of these funds are left with banks for longer periods of time. The Basel liquidity rules recognise this behavioural aspect, and acknowledge it in the rules. As a result, Absa is continuing to focus on obtaining funds from retail and commercial investors by offering competitive products and services.
Standard Bank said the South African economy does not have enough household savings to enable banks to meet the proposed liquidity requirements.
But the tightly regulated nature of the industry and the fact that the rand was a controlled currency make it very unlikely that local banks will ever require the level of high-quality liquid assets proposed under Basel III.
The issues relating to long-term liquidity and the net stable funding ratio, which comes into effect in 2018, were still being finalised at international level. Standard Bank said that Basel III allowed for areas of national discretion. Referring to the Reserve Bank’s liquidity facility, FirstRand said: “The net stable funding ratio requirement final text will be issued later in 2015. The industry is working with the treasury to assess the impact and possible remedies to comply with this requirement in 2018.”
Nedbank Group managing executive for balance sheet management, Trevor Adams, said Nedbank believes that it “does encourage savings through competitive savings and investment products”.
He said that pricing was also determined after incorporating regulatory and taxation regimes applicable to the bank and these are not necessarily the same as those applicable to other financial institutions, which offer savings and investment alternatives.
But Basel III was likely to “result in a levelling of playing fields across the financial services industry and may result in higher interest rates on certain products as institutions will compete more aggressively for the Basel III friendly deposit pool,” he said. – Lynley Donnelly