The weakening asset quality of South Africa's banks is not seen as posing a major systemic threat, the SA Reserve Bank (SARB) said in its Financial Stability Review September 2009 released on Tuesday.

"Banks have maintained high levels of capital and continue to be profitable, albeit less so than before," the SARB said.

Conditions were likely to improve gradually in an environment of relatively less tight monetary policy combined with a bottoming out of the economic downturn.

The SARB said the interim results of the big banks confirmed that the tougher operating environment had resulted in declines in headline earnings.

"Factors that impacted on banks' interim results included the slowdown in economic activity, rising credit impairments, falling interest rate margins and the reduction in the value of investment portfolios."

SARB said at the end of the second quarter of 2009, banks' largest concentration of exposure was still in the private household sector.

"Overall, the distribution of private sector credit across industries remained fairly stable over time.

"However, deteriorating domestic economic conditions and the indirect impact of the global financial crisis have been felt by banks mainly through continuously rising credit impairments."

The SARB said since December 2008, impaired advances rose by 37.5 percent to a level of R124.9-billion in June 2009.

"The slowdown in economic activity and prevailing stricter lending conditions by banks resulted in a further moderation in growth of total loans and advances during the first half of 2009.

"Combined with the continuous increase in impaired advances, the quality of banks' loan books was bound to be affected negatively," the SARB said.

Sapa

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