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Will our banks be able to withstand the escalating SOE crisis?

South Africa need not wait for the next credit crisis – we’re in one.

South African banks are already buffering up to weather the loss of confidence in the South African economy – with expected low growth, policy uncertainty and poor governance in state-owned entities (SOEs) compounded by global tensions, political uncertainty in sub-Saharan Africa and the climate crisis.

They must now be feeling nervous as zombie SOEs begin to hit the wall.

Because it is so difficult to get a handle on the dire financial situation of the many SOEs, and the total amount of government guarantees issued, it is difficult for any financial institution to plan for the possibility of government knocking on the door, demanding money.

It is also highly unlikely that the government has any idea of the clauses contained in SOE loan agreements (and other fine print), such as a default clause requiring annual financial statements to be published on time.

It is obvious from the R3.5 billion loan to South African Airways (SAA) coerced out of the Development Bank of Southern Africa (DBSA) that government does not have its own funds, and that National Treasury has put a stopper on funds being taken out of the Special Appropriation Act for “urgent needs”.

Read: Concern that DBSA will divert infrastructure funds to SAA

This is the beginning of the state now turning to SOEs, the Government Employees Pension Fund, and of course, South Africa’s well-run financial institutions.

It is to be noted that DBSA’s debt-to-equity ratio (excluding R20 billion callable capital) is 138.1% at March 31, 2019 (2018: 156.2%). The expected credit losses amounted to R1.4 billion (2018: R623 million). I calculated the ratio to be 1.9% (2018: 0.83%).

In my view, the full amount of R3.5 billion loan to SAA will have to be impaired in March 2020.

South Africa is facing a future with uncertain outcomes.

Read: SOEs’ results proof of massive problems

How ready are our banks to weather a credit downgrade, customer nervousness, and pressure from government to further “invest” in government projects (cost of corruption)?

South Africa need not wait for the next credit crisis, we are in one.

Looking at five banks only, South Africa’s banking industry is in fine shape.

Below is a table showing the regulatory requirements mandated by Basel III (The Basel Capital Accord was introduced by the Bank of International Settlements in 2001 to standardise the risk management practices of international financial institutions.

Capital ratios (%) 1 2 3 4 5 6
  CET1 Tier 1 Total LCR CLR NSFR
Basel III 8 8 10.5 100   100
Standard Bank Dec-18 13.5 13.5 16 116.8 0.56 118.6
FirstRand Jun-19 13.4 14 16.8 133 0.95 117
ABSA Dec-18 12 12 14.9 116.7 0.73 110.1
Nedbank Dec-18 11.7 12.5 14.8 109.4 0.53 114
Investec Mar-19 10.5 11.2 14.4 135.6 0.28 115.6

1. Common equity tier (CET1): security instruments have the highest level of subordination

2. Tier 1: additional Tier 1 capital

3. Total capital adequacy

4. Liquidity coverage (LCR)

5. Credit loss ratio (CLR): measures impairment charges as a percentage of average loans and advances, incorporates full IFRS 9 impact

6. Net stable funding (NSFR): stable funding that covers the duration of long-term assets.

The above banks do not indicate whether they have already granted loans to any SOEs. But Investec, in its 2019 annual report, states that it “reviewed the group’s exposure to state-owned entities and related risk appetite”.

So far, the credit loss exposure (CLE) of the above banks remains below 1%.

However, the CLE will escalate if banks are forced to bail out SOEs. And this could put the stability of our banking system at risk.

Standard Bank chair Thulani Gcabashe, in the bank’s 2018 annual report, referred to the “enormous destruction of value that has taken place, in both the private and public sectors, when leaders choose to abandon decency”. CEO Sim Tshabalala warns “that economic growth must be inclusive if it is not to be derailed by populist policies and institutional decay”.

In this new decade, it is apparent that this destruction of value will continue unabated.

Read: Eskom and SAA: The SOE project has failed

Apart from Eskom and SAA, what other SOEs are running into trouble and will be at risk of defaulting on loans?

A key SOE, but one that doesn’t hog the headlines, is Trans-Caledon Tunnel Authority (TCTA), which is mandated with financing and implementing bulk raw water infrastructure projects. It has not produced its 2019 annual report. 

Read: Trans-Caledon Tunnel Authority – another audit delayed

In response to my recent query for an update on the status of the 2019 report, it replied: “The TCTA Annual Report has not been published as yet. In line with Parliamentary process the report can only be published after it has been tabled in Parliament. It is expected that this will happen after the opening of Parliament.”

Note, TCTA’s financiers expect the authority to comply with contractual agreements (some of which require annual reports to be published on time), and to report on good governance (obviously in the annual financial statements).

In 2018, the carrying cost of market liabilities (not fair value which is discounted), was sitting at R29.7 billion. If a loan defaults, it is unlikely that the tariff receipts will cover this.

In its 2018 annual report, TCTA noted the “default risk of potential failure to raise adequate funding for the redemption of the WS05 bond, following an abandoned auction, and compounded by the disruption of revenue from DWS [Department of Water and Sanitation]”.

And the update on this? Patience.

We will have to wait for the belated 2019 annual report to be filed in parliament. Or for one of the loans to default.

Some pre-emptive planning by government would be nice.

The government is floundering and has no idea how to rein in errant SOEs.

In its ignorance, it is most probably eyeing the market capitalisation of banks, thinking it can tap into this.

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Whether or not the banks manage to ride the storm presented due to their exposure to SOE’s is one thing. But, it seems almost certain that they would not survive the 18th amendment of the constitution as currently proposed.

Then again, that would probably be the ‘stone slab’ that breaks the camels back and the ‘absolute’ point of no return.

So is a single one of the 700 odd SOE well run?

that would imply logical thinking which there is None.

The private banks make independent decisions about the profitability and risks involved in loans to any entity. The government does not have a direct mechanism to force banks to lend to SOE’s.

The interest rate is supposed to compensate for the risk. So, in a free market, the interest rate will reflect the risks involved. Bond auctions are oversubscribed. That means that international investors see the risks, but due to a lack of alternatives, they still buy our bonds. At least our government debt is fairly priced, whereas European and American debt is overpriced. The zero interest rate regime in the USA and Europe is not a true reflection of the risks inherent in their government debt and banking systems. When they buy our bonds, the international investors are saying that our debt is cheap compared to the alternatives.

The government does have an indirect mechanism to force all banks and savers to fund government debt though. This indirect mechanism is called financial repression and it actually is IMF policy. It comes down to stealthily stealing the purchasing power of savings by manipulating interest rates and inflation. When the after-tax return of our savings is less than the true rate of inflation, we are paying down government debt. This is where prescribed assets enter the scene. The government will make a law to force savers to pay down government debt. It is a form of expropriation without compensation. This is how the average voter steals from the average property owner. This is an infringement of property rights.

probably only perdon who started buying Visa and Mastercard from 2017 instead of SA Banks….naaaah i’m good now lost my money investing in SA Banks…well as for our government…It’s a scam, fraud…whole thing must be shut down

A good and scary article Barbara and, to my tiny mind, starting to maybe explain why my RMB shares are down, to my surprise as I thought they would at least tread water. Is it possible that banks own lots of state and SOE debt but have it quite highly rated – good interest earned and, up until now, low possibility of a default? So it doesn’t show up as a risk and compliant auditors duly tick the box.

Is there a very nasty surprise waiting when one worm turns and calls all and any SA state debt high risk? EWC could be the trigger.

One wonders if the Commercial Banks would have any negotiating power on EWC policy if the state was eyeing their market cap.

Case in point: the Land Bank which is a state bank for the farm sector, was downgraded by one of the ratings agencies 2 weeks ago. That was closely linked to the higher risk to the bank from RWC policy.
Google how the Land Bank WARNED government about the risks to banks from EWC.

It’s time the banks grew a backbone and stood up against EWC. Management put their own myopic stock options and bonuses ahead of their fiduciary responsibilities.

What will be left of banks after the anc enacts their Marxist policies?

….. and the climate crisis. Don’t forget the climate crisis. OK?

Forget the banks, what about the individual tax payer? In the last 11 years, the electricity tariffs has been increased by 550% compounded. The water tariffs and increased rates and taxes has also affected every household. Vat has gone up. Fuels levy has increased. No solution to the E-tolls. Now awaiting the tax on the AIR that we breath.

These revolutionary masters in the ANC must be scratching their heads, wondering how they made a bigger mess of this place than the racist Nats, who will forever be remembered as racists, which is no worse than the ANC, who will forever be remembered as thieves.

SA Banking stock – must be a sell, not a hold or buy?

They must start disclosing their exposure to SOEs like Investec did if they want their stock to be a hold or buy!
This is EXTREMELY important in the current climate…

Well if they’re sensible they’ve been cutting their exposure to SOE’s and not lending any further money to them. Expropriation could take the whole show down though that’s for sure, credit risk would simply explode through the whole economy.

The bank index chart is in fact breaking through 2 year old support today, so big downside is certainly possible already.

Short answer – no. There is already a knock on effect of falling property prices and not to mention what would happen if the EWC knocks the banks as well.

So many pros and cons. We need to fly as a country. We have told all the major developers that we have invested with to PROUDLY hoist our Stunning SA flag on all their developments and all throughout KZN! We will tell Signatura as well. National pride is required to pull us together during this crisis! We must be united as the dynamic nation we are! We have properties around the world so I can leave at any time. But i am here to stay and make this the best country in the world!

The difference between a migrant and a refugee is a matter of timing

“South Africa is facing a future with uncertain outcomes”

Not quite. SA has many examples to our north to search for in indication of African country “outcomes”. SA is ruled by Africans, with similar political policies, why should our economic prosperity be different than rest of Africa? SA is reverting the “mean average” (demographics also at play), but let’s please be patient….we’ll get there.

At least I can provide some certainty here, being that SA’s future is certain (some will say, that’s “negative thinking”).

Fair enough, positive thinkers just say it differently “the future outcome is uncertain”….but no, we’re not negative 😉

Many are worried about SOE’s defaulting.

But the banks earn great interest on these bonds, don’t they?

Don’t worry about the investment risk of your Money Market or Fixed Deposit at the bank…..(i) the SA taxpayer will typically bail the SOE’s out, and (ii) when the taxpayer can’t do it anymore, the country has R4 trillion in retirement fund assets to cover the SOE’s via prescribed assets 🙁

So your cash investment will likely be safe for a long time, but its no use if part of your pension/RAF is going to get looted behind your back.

Speaking under correction – SOE Denel is also very bailout dependent. Not sure if it has tabled FS in parliament in 2019. And is the SABC servicing it’s loans and managing to pull out of the crises? (Much more needed than an airline.)

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