SA retail banks face key challenges

Director of Assurance, Emilio Pera, notes that of the big four South African banks, Absa and Nedbank are undergoing or set to undergo changes in leadership in the short term.

"They are replacing CEOs within the short term and it will be interesting to see how the markets react.

"Unprofitable mortgage books have prompted banks to revise their business models, particularly in sourcing new business," says Pera.

Pera says that most banks' mortgage portfolios were not profitable in 2008.

He adds that management of international operations will be "critical in the next few quarters".

"Foreign banks have substantially wound down their activity in the SA market," he said.

He notes that until the second half of 2008, slower retail growth was compensated by robust corporate activity, but corporate bad debt levels may start rising in 2009.

Credit growth has fallen off in most product areas - secured and unsecured lending alike.

Pera says that investment bank profit growth slowed considerably in the fourth quarter of 2008, "but remains positive".

He says some banks are better placed than others to cope with the current downturn "depending on portfolio of business". He notes that credit rationing and credit cost would differ depending on the portfolios as well.

"Locally, banks are re-assessing undrawn borrowing and revolving credit facilities provided to corporates," says Pera.

"Cash is in short supply and has become expensive to access," he adds.

He feels treasuries within banks will play a "more crucial role than ever" in attempting to soften the impact of the capital market volatility.

In light of mounting concerns over counterparty non-performing risk, key processes are better identifying the actual counterparties and providing a better understanding the rights and obligations in relation to each transaction/structure.

Also important will be monitoring the related risks "keeping in mind that the credit worthiness of a counterparty can change rapidly".

Both RMB and Absa have recently faced losses after problems with counterparties in the single stock futures arena.

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