Are SA Banks Too Big and Too Fat?

The five big banks in SA account for 90% of all banking assets in the country. In USD terms, the banks have combined assets of $430 billion, larger than SA’s $400 billion GDP.

This makes the banks, effectively, an arm of the state. They cannot be allowed to fail. Yes, they answer to regulators but it’s more like a buddy system. Try coming up against the banks in a dispute or, heaven forbid, a court case, and see how far that gets you. Even the Competition Commission has battled to prove a conspiracy involving some 26 banks where they were accused of manipulating the rand, despite presenting as evidence snapshots of the chat groups they were sharing and despite whistleblowers coming forward.

Now take a look at the chart below which shows banks’ headline earnings growth (in black) handsomely outpacing the rate of economic growth. The yellow line shows quarterly GDP growth, the red line shows the rate of growth in banks’ headline earnings. That spike in the red line shows what a feast Covid was for the banks. They dined out on that for the next two years.

Source: PwC Major Banks September 2024

Now look at the net interest margin in the chart below. Lending volumes have grown nearly 50% since 2017, while the net interest margin has been increasing since 2020, and is now at the same level it was in 2016 – around 4.6%.

In comparison, the average net interest margin in the US is 3.1% and 1.6% in the EU.

That’s because there’s more competition in the US and EU. You will hear the banks and regulators in SA explain this away by pointing out that we operate in developing market conditions with higher risk (therefore we must charge higher interest) and SA banks are benefitting from increasing profit flows from riskier African markets. But I would suggest this is a feature of market concentration.

Source: PwC

It’s a great business to be in. It’s also one begging for competition – which is coming in the form of fintechs and crypto disruptors offering cross-border forex payments at a fraction of the usual outrageous costs (we’ll dig into that in a future article to explain how forex costs are buried in the spread).

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