An introduction to SA bank balance sheets (graphs)

To get a sense of the credit market in South Africa, it is useful to see who funds whom. Most credit in SA is extended via the banking sector. The banks act as intermediaries: savers deposit cash in checking or savings accounts and the bank then lends the majority of these deposits to other individuals or businesses who demand credit. The bank earns a profit by charging a higher rate on the lending than it pays on its borrowing (in SA, banks appear to earn profit on their borrowing as well, by paying a rate on deposits below inflation). The following graphs plot the different components of the aggregate balance sheet for all South African banks.

I first plot the total liabilities of South African banks. This adds up to a bit more than 3 trillion rand, of which 2.7 trillion is deposits. The remainder consists of repo transactions (Borrowed Funds), foreign currency funding, and subordinated debt securities (Other Liabilities).

Liabilities Deposits in checking and savings accounts as well as money market funds is the channel through which we ordinary citizens lend money to banks. Banks can then lend the funds to other households and businesses. However, a closer look reveals that deposits include much more than just household savings. The figure below illustrates the importance of both financial firms (fund managers, money market funds, pension funds, insurers etc) and non-financial corporations. Household deposits only account for a fifth of total deposits. The role of fund managers and money market funds have clearly become a very important channel of directing savings onto bank balance sheets. DepositsThe remaining liabilities of banks are categorised as “Other Borrowed Funds”, “Foreign Currency Funding” and “Other Liabilities”. The “Other Borrowed Funds” are mainly repurchase transactions, typically short term debt where the borrower submits collateral for the entire amount. This is typically used to cover short term needs for cash, often to cover the required reserve ratio with the South African Reserve Bank. Banks can also use this as temporary financing to extend loans without having to wait for customer deposits to fund the lending. BorrowedFunds

It is slightly surprising to see that repo borrowing actually increased to a higher permanent level after the global financial crisis. It was this type of borrowing, on a much larger scale, that enabled US financial institutions to build massive leverage with an extreme maturity mismatch. The maturity mismatch refers to the short term nature of the debt, often overnight funding, combined with the long term nature of their assets, often household mortgages with maturity over several years. This is not a major concern in South Africa – despite the increased use of repo funding it still only accounts for approximately R100 billion out of an aggregate balance sheet of R3000 billion.

FX

Foreign currency funding, plotted above saw a huge leap during the financial crisis, and has stayed high ever since. But as was the case with repo funding, foreign currency funding still accounts for only R100 billion out of a total balance sheet of R3000 billion.

The figure below plots “Other Liabilities” which consists mainly of subordinated debt securities. Here we see the same pattern again, of a sharp increase in recent years. This type of lending adds up to approximately R200 billion out of the total R3000 billion. Again not a very large amount.

OtherLiabilities

 

As one would expect from ordinary banks, we have seen that deposits account for the vast majority of their funding. We call this “core liabilities”. The more unconventional funding of banks, mainly repo transactions, foreign currency funding and subordinated debt securities were each of less significance. However, if we add up all these “non core liabilities” we see that the use of such alternative funding has greatly increased in recent years. This may be a consequence of a strong demand for credit combined with low rates of savings. It also indicates that banks are eager to lend out money; so eager that they choose not to wait for deposits to come in, but rather use alternative borrowing to fund such credit extension. This may be a good thing in an economy with lackluster growth, but this is a risky business and a crash in these markets will have dire consequences for the real economy. So keep watching these numbers, they do give a good sense of how South Africa is doing.

NonCore

Non Core Funding of South African Bank Balance Sheet

Banking: Where is the rumored consumer credit boom in South Africa?

Just posting a quick note on a novelty in SA markets. There has been much talk about the unprecedented consumer credit boom (and much feared bust) in South Africa. See for example Bloomberg’s “South Africa: Unsecured credit boom may not bust” or an older piece on Moneyweb referring to assurances from the SA Reserve Bank that the unsecured credit boom is no bubble.

The figure below illustrates the total credit card debt owed to banks operating in South Africa.

The next figure plots credit card debt owed to the top five banks separately:

And the last figure illustrates the credit card debt owed the top five banks as a ratio of their total assets:

I will leave the long story for someone else to tell, but I have a couple of comments. The first figure clearly shows that South African households and corporates do have an increasing amount of credit card debt to SA banks. Most strikingly is the sharp jump in November 2012. Prior to November 2012, we saw a healthy growth in credit card debt, though not nearly as rapid as prior to the global financial crisis. Adjusted for inflation, this growth seems rather modest and does not give much reason for concern.

Now, back to the spike in November 2012. This looks a lot more dangerous and does warrant a minor investigation. Now, the investigation is very simple: if you have paid attention to the markets recently, you would perhaps have picked up on the news that ABSA acquired Edcon’s account receivables, including all purchases made on credit at Edgars, Jet and Boardmans. This purchase is clearly reflected in the second and third figures where you will see that the entire jump in November 2012 was driven by Absa’s balance sheet. In other words, there was no jump in credit indebtedness, this was rather a move of existing credit from the balance sheet of retailers onto the balance sheet of banks. This number gives no indication of how much credit is still outstanding to the retail sector in South Africa. It does however remind us that the retail sector has become a huge player in the unsecured credit market, where the debt of one retail group makes a great impact on the total credit outstanding to South African banks.

The conclusion to draw from this is that bank balance sheets give us a surprisingly poor view of the indebtedness of the population. The purchase of Edcon’s credit receivables had a huge impact on the total credit card debt owed to banks. If there is such a thing as an unsecured credit bubble in South Africa, it is not caused by bank’s recklessness, but rather by the retail sector’s trust in its own ability to judge the consumers’ creditworthiness. Absa is now the odd bank out, with credit card debt accounting for as much as 35% of its’ total assets and 46% of its total equity.