Stay abreast of COVID-19 information and developments here
Provided by the South African National Department of Health
do banks have anything to fear?
Renier de Bruyn
Sep 27, 2018
Given our country’s legacy of apartheid and the general failure of the ANC government’s land reform programmes, the issue of unequal land ownership undeniably remains a huge economic and social challenge that needs to be addressed urgently.
The exact mechanics of how government plans to carry out EWC remain unclear, with mixed statements coming from politicians across the spectrum. The wording of the parliamentary motion, as well as personal undertakings by the President, make it clear that EWC should ‘not undermine future investments in the economy, or damage agricultural production or food security’ and ‘must not cause harm to other sectors of the economy’.
One may well wonder whether this isn’t wishful thinking on the part of politicians, who are often disconcertingly ignorant of the unintended consequences of their actions. We should, however, be grateful that at least the government is giving some regard to the potentially negative ramifications of EWC.
The industry most at risk if EWC is implemented on a large scale, and not in terms of the current ambit of the Constitution, is the banking sector. The banks are directly exposed to EWC through financing provided to farmers, companies and households, which may be unable to repay their loans under those circumstances.
While our big four banks have only 1-3% of their total loan books exposed to agricultural clients, the uncertainty of the potential scope of EWC (‘property’ in Section 25 of the Constitution is not limited to land), may result in a much larger portion of loan books being affected. The Banking Association of South Africa estimates that loans of around R1.6 trillion are directly exposed to property in South Africa.
A bank acts as a financial intermediary by channelling savings from depositors, such as households or pension funds, to borrowers. There’s usually a mismatch between the terms of a bank’s deposits and its loans, which makes it extra vulnerable to a financial shock or even just a confidence crisis leading to mass withdrawals by depositors.
The Land Bank noted in its most recent annual report that if EWC were to materialise without protection of the Bank’s rights as a creditor, it would immediately have to repay R9 billion of its funding subject to a clause on expropriation, as an ‘event of default’. This would have repercussions for its entire R41 billion funding base, leading to a collapse of the Bank and likely requiring a substantial government bailout.
Mass EWC impacting the collateral supporting bank loans would create systemic risk to the South African financial system, with disastrous economic consequences. These include higher inflation, unemployment and interest rates, falling property prices and a protracted recession, to name but a few. In short, an inconsiderate, mass-scale ‘land grab’ would probably lead to a failure of our banking system. It would be devastating to our economy and certainly detrimental to the cause of the poor that EWC is trying to benefit.
On the other hand, a successful and integrated land reform programme may be beneficial to our economy in the long term. Brazil is a good example of successful agrarian land reform after a colonial past. The country has dramatically increased its agricultural production over the past 30 years, while transforming land ownership – today Brazil is one of the world’s most competitive food exporters.
Court-approved expropriation of unproductive land with fair compensation to the owners formed part of the Brazil reforms. Importantly, coherent government policy provided support to the development and modernisation of the whole food production value chain, including new farmers, in the form of research support and funding mechanisms. New farmers received title deeds to their land, which provided secure tenure and allowed for their property to be used as loan collateral.
Returning to our banks, the impact of EWC will depend on how it’s pursued, with a wide range of potential outcomes, ranging from relatively benign to systemic failure. The severe economic consequences on all South Africans of a financial meltdown would be too great a price to pay for any rational government. I’m therefore of the view that market forces will compel government to carry out land reform in a responsible manner.
A number of reputable legal experts have publicly said the government can pursue land reform successfully without the need to amend the property rights enshrined in the Constitution in its current form, and that an amendment would only create unnecessary uncertainty, which will hamper investment and constrain economic growth.
When we craft portfolios, we try to position them around our base case view of the world, but we always maintain appropriate diversification to protect portfolios against unexpected results (tail risk). With regard to the EWC debate, my base case view is that based on our banks’ systemic importance to the economy, government won’t implement land reform in a way that would jeopardise their rights as a creditor.
With dividends reinvested, the FTSE/JSE Banks Index has outperformed the All Share Index over the past 15 years by about 2% per year, despite this period including the world’s biggest financial crisis since the Great Depression. From current valuations and given our base case views, we continue to expect appropriate risk-adjusted returns from the sector over the medium term.
In our house view equity portfolio, we reduced our exposure to banks earlier this year on valuation grounds, following their strong share price performances. The sector has subsequently pulled back and valuation levels now again appear more attractive. We currently have around 10% direct and indirect exposure (through Remgro) to South African banks in this portfolio.
Sanlam Private Wealth manages a comprehensive range of multi-asset (balanced) and equity portfolios across different risk categories.
Our team of world-class professionals can design a personalised offshore investment strategy to help diversify your portfolio.
Our customised Shariah portfolios combine our investment expertise with the wisdom of an independent Shariah board comprising senior Ulama.
We collaborate with third-party providers to offer collective investments, private equity, hedge funds and structured products.
2020: A watershed
for the world
Director of Investments
Lessons for investors
after a topsy-turvy year
Sanlam Private Wealth
the case for emerging markets
Head of Global Emerging Markets, Sanlam Investments
Vaccine news: game changer
for financial markets?
Director of Investments
CHEAP SHARES: ARE THEY
ALWAYS A BARGAIN?
Senior Investment Analyst
How we position portfolios
in a volatile world
Director of Investments
SA listed property:
is it a value trap?
Sanlam Private Wealth
Mini budget: foreign investment
crucial to address fiscal woes
Investment Economist at Sanlam Investments
South AfricaSouth Africa Home Sanlam Investments Sanlam Private Wealth Glacier by Sanlam Sanlam BlueStar
Rest of AfricaSanlam Namibia Sanlam Mozambique Sanlam Tanzania Sanlam Uganda Sanlam Swaziland Sanlam Kenya Sanlam Zambia Sanlam Private Wealth Mauritius
GlobalGlobal Investment Solutions
Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.