In the late 1990s 45 banks, mutual banks and homeland banks were operating in SA. That fell to a low of 18 by 2010, following a crisis of confidence in small banks. But the long hiatus since is over with the count of banks back up to 23 following a rush of new entrants. What will it mean for the marketplace? A look back at the last upcycle reveals a few things.
Bank registration rates follow regulator and market appetites. The last strong upcycle was in the mid-1990s when the new ANC government encouraged licensing to drive competition and the creation of black-owned banks. A raft of new investment banks had their eyes on lucrative government advisory contracts. Those that entered were focused on the fruits of restructuring — advising the government on how to raise funding and sell assets.
The wheels came off following the 1998 emerging-market crisis when interest rates soared to a high of 25.5%. The wave of defaults that followed led to a loss of confidence in small banks and funders abandoned them. Those that could liquidate their assets fast enough settled their liabilities and handed back their licences. Others were sold or put into curatorship.
The loss in confidence reached crisis proportions when Saambou collapsed in 2002 and BOE was forced into an emergency sale to Nedbank in 2003.
The fundamental problem is that many of the small banks had taken on too much liquidity risk — short-term deposits used to fund long-term loans. The competition for deposits was fierce, with high rates offered to attract both retail and corporate clients. At the first whiff of panic, those deposits could be pulled out of the banks fast, leaving them with a clutch of long-term loans and no cash to meet obligations.