The credit crunch and the regulatory response to the global crisis were the main risks that the South African financial services sector would face this year, auditing and business advisory firm Ernst & Young (E&Y) said on Monday.
“The common highest ranked risk across the financial services sector stems from the credit crunch, owing to its extraordinary and direct impact, as well as its unpredictable evolution,” said E&Y lead financial services director Emilio Pera.
The second corresponding risk factor, which occurred within three segments of the financial services sector – insurance, banking, and asset management – was the regulatory response to the current crisis, he added at a briefing in Johannesburg.
Pera said that the regulatory response to the crisis could affect the competitive environment of the industry.
“The nationalisation of a number of banks would have been hard to imagine months previously. The regulatory backlash may extend beyond banking into insurance and asset management.”
Despite the threat of the credit crunch, the impacts of the economic downturn on the South African banks have been less severe than international markets. Pera said that most local banks have performed well, and only those with a larger international exposure have felt a slightly more severe impact on their share prices.
“I suppose that that demonstrates that South Africa has been protected from the direct impact of the global credit crisis, although the indirect impact is flowing through to our economy.”
Pera said that it was unlikely that the South African financial services industry would see a regulation change within the short-term.
“What came through is that we have quite a robust regulatory environment. However, over the longer term, the international changes in regulation will obviously filter through to the local banks and to the local financial institutions.”
Other risks included a deepening recession, and managing talent, he noted.
Managing talent has always been critical in South Africa, and Pera added that South Africa had a relatively small pile of strong talent, especially at executive level.
“But because of the global economy, a lot of skills and resources are becoming available globally, and there is now less opportunity to move outside the South African market, where we have been relatively protected.”
Another issue affecting the South African banking sector, was cost cutting. This issue has not been as prominent in the global banking markets, said Pera, as the global industry was more focused on mitigating revenue collapse.
“South African banks are not under that much pressure as far as the revenue side is concerned, so we are focussing on the cost cutting [side].”
However, Pera noted that the international banking industry had learnt some lessons, which the South African industry could take to heart.
“There are many lessons to be learnt from the events unfolding in the financial industry, the vital importance of managing for liquidity, the need to institutionalise an appropriate risk culture, and the imperative never again to let good times lead to complacency.”