Tuesday, August 3, 2010

SA's growing wealth gap is seen as challenge for banks, says S&P

By Mzwandile Jacks [Business Report] - July 23, 2010

South Africa's low wealth levels and high social inequalities had restrained its economy and could spark a disaster, according to the global ratings agency, Standard & Poor's (S&P).

S&P's Europe, Middle East and Africa (EMEA) financial institution analyst Matthew Pirnie said this was a challenge that South Africa's top five banks - Absa, Standard Bank, FirstRand, Nedbank and Investec - had to deal with.

Another S&P EMEA financial institution analyst, Ekaterina Trofimova, said high social inequalities had the potential to trigger a crisis.

Konrad Reuss, the managing director of S&P South Africa, said this country's economy was still in a fragile state of recovery from the recession.

"The labour market is still fragile and we could see a double-dip recession or just stagnation," Reuss said.

South Africa's high unemployment rates have caused low wealth levels and high social inequalities.

The country lost 79 000 jobs in the first quarter as tough economic conditions continued to bite. These job losses were greater than other emerging markets, such as Israel, Malaysia, Taiwan, Brazil, Poland and China.

Merina Willemse, an economist at Efficient Group, said household wealth had surged somewhat in the first quarter of this year.

At the beginning of last year, according to Willemse, household wealth was less than 10 percent, but has since increased to 20 percent in the first quarter of this year.

"However, there are still a large number of people who do not pay taxes because they are poor and unemployed. And that is not going to change now," Willemse said.

Pirnie said unemployment was not good for asset quality of an emerging market. "It really does destroy it sometimes," he said.

He said that the deteriorated loan portfolio quality and moderate provisioning levels of local banks were some of the weaknesses inflicting these financial institutions.

Earlier this year, South Africa's biggest retail bank, Absa, said it was expecting impairments to slow down this year. This was after it posted a lower 2009 profit on the back of rising impairments, which doubled in the first half of the past financial year. Impairments reflect the difference between the value of the asset in the accounts of these banks and their actual worth.

Africa's biggest bank by assets, Standard Bank, said it expected its non-performing loans to peak in its second quarter as South Africa recovered from the recession.

It would restore earnings to 2008 levels after 2009 profit fell, warning credit conditions would remain under pressure after bad debts knocked profits last year. This was after debt-squeezed consumers at both its retail and corporate businesses struggled to pay back loans.

South Africa's fourth-biggest bank, Nedbank, said it remained cautious about an improvement in impairments.