In this section, we will be looking at the Banking sector structure of South Africa & compare it with the economy of Brazil. We will discuss topics like number of banks, concentration ratios, banking sector credit-to-GDP, liquid liabilities-to-GDP, foreign bank penetration, leading competitors, profitability, and risk and asset quality. South Africa has the largest and most sophisticated financial market in Africa. The financial services sector, in particular the banking sector, has well-established credit and management information systems. The South African banking system is well developed and effectively regulated by the central bank – the South African Reserve Bank- as well as a few large, financially strong banks and investment institutions, and a number of smaller banks. Many foreign banks and investment institutions have operations in South Africa. The SA banking industry is made up of 17 registered banks, 2 mutual banks, 12 local branches of foreign banks, and 43 foreign banks with approved local representative offices. Brazil on the other hand has a large no of banks which are operating in different parts of the country. With these numbers of banks in SA the banking sector in South Africa is highly concentrated. In South Africa, the top four banks have approximately 89% of retail deposits. This is high by international standards. The Herfindahl-Hirschman Index (H-index) is a widely respected barometer for measuring market concentration in a banking system. The level of concentration in the South African banking sector measured using the H-index is presented is given below. The index measured 0.187 at the end of December 2011 which means very high level concentration. The high concentration prevalent in the South African banking sector is attributable to the high concentration of banking-sector assets among the four largest banks, which accounted for 84.1 % of total banking-sector assets at the end of December 2011. While for Brazil as there are so many banks present the concentration ratio should be very less and it will have a great competition (though the H-index for Brazil was not available anywhere). Investment and merchant banking remains the most competitive front in the industry, while the country’s “big five” banks – Absa, FNB, Standard Bank, Nedbank and newcomer Capitec – dominate the retail market. The oligopoly structure and the perception that there are high costs in delivery of retail banking services in South Africa have militated against entry into the retail banking sector. However, a number of foreign entrants have taken advantage of the relatively lower costs of entry into the corporate banking sector, which has increased the level of choice and countervailing power in this sector. It has attracted a lot of interest from abroad with a number of foreign banks establishing presence in the country and others acquiring stakes in major banks, for example, the Barclays – ABSA and Industrial and Commercial Bank of China – Standard Bank deals. As mentioned above the banking sector has 43 international banks with authorised representative offices in South Africa. There are more than 15 countries who have their banks in Brazil with over 130 branches spread across Brazil all performing different functions. (Source – Central Bank of Brazil). Liquid Liability – Liquid liabilities are also known as M3. They are the sum of currency and deposits in the central bank (M0), plus transferable deposits and electronic currency (M1), plus time and savings deposits, foreign currency transferable deposits, certificates of deposit, and securities repurchase agreements (M2), plus travellers checks, foreign currency time deposits, commercial paper, and shares of mutual funds or market funds held by residents. So compared to South Africa, Brazil has always had more of liquid liability and it also has been increasing year after year. But for South Africa there seems to be slight dip from 2009 to 2011. Profitability- The most common measure of bank performance is profitability. Profitability is measured using the following criteria: Return on Assets (ROA) = net profit/total assets shows the ability of management to acquire deposits at a reasonable cost and invest them in profitable investments (Ahmed, 2009). This ratio indicates how much net income is generated per £ of assets. It is usually said that higher the ROA, the more the profitable the bank. As seen from the graph below that ROA of South Africa took a dip in 2010 due to the crisis but has been improving significantly in the last two years. ROA ratios for Brazil were not available. Return on Equity (ROE) = net profit/ total equity. ROE is the most important indicator of a bank’s profitability and growth potential. It is the rate of return to shareholders or the %age return on each £ of equity invested in the bank. As seen below in the chart the ROE too has been improving from 2010 after it saw a dip because of the crisis. ROE ratios were not available for Brazil. Now we compare these two countries and see the pros and cons based on the points discussed above. The numbers of banks in South Africa are less and they have an oligopolyÂ form of markets and so the cost to enter the markets may be high. And opposite to that the Brazil has very large no of banks so the competitionÂ faced will be very high. The concentration ratio is directly proportional to the no of banks present. SO the concentration ratio is very high in South Africa as compared to Brazil. Participants in the oligopoly marketÂ frequently maintain their position of dominance because it is too costly or difficult for potential rivals to enter the market or due to the high cost of entering the market the oligopoly market exists. The foreign penetration in both the country seems to be quite good but with Brazil having more of the foreign banks. In this case investing in South Africa seems a better option just for the reason of facing less competition in South Africa. The M3 ratio for Brazil is on an increase but for South Africa these has been a slight dip showing that there is a lot of scope of improvement in that area. The profitability ratios have been on an increase for South Africa which is a good sign. But looking at their peaks in 2008, this area also seems to have a lot of scope of improving. So, in conclusion, investing in South Africa is a good option but not in retail area but in the commercial area.
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