By

Banker’s Law 02 | Banking practice and the law: Expropriation poses significant risk

YOUR INSIDERS REVIEW

Here follows our bi-monthly short update on banking practice and the law, providing essential knowledge to busy bankers.

 

BANKS AND LAND EXPROPRIATION TALKS
(approx 3-minutes reading) The banking sector feels at risk. The Banking Association of South Africa (Basa) has warned that land expropriation without compensation could pose a significant risk to the banking sector. The current exposure banks have in relation to property is approximately R1.613 trillion in the form of land that is mortgaged. This amount excludes other types of loans afforded to borrowers premised on their net worth and which is not secured by the registration of a mortgage bond. Basa states that a marked decrease in the value of land, which will be caused by either an amendment to legislation and/or market uncertainty, and the resultant reduced appetite from property buyers, could destabilise the banking sector. It is important to consider these concerns against a proper understanding of expropriation, on the one hand, and expropriation without compensation, on the other. The instances where no expropriation will be allowed, are limited. The fear of such a step is probably more damaging to the banking sector and property industry than a single act of expropriating land without compensation, will be.  Our note here, explains in more detail when it will be possible to expropriate without paying compensation. It is definitely not a default position, but something that can occur in a small portion of cases only.

 

WHICH BANKS CONTROL ALMOST 90% OF ALL BANKING ASSETS?
(approx 3-minutes reading)South African Reserve Bank’s (‘SARB’) Prudential Authority has shown in its latest annual report (2019/2020) that the big five local banks – Standard Bank, FirstRand, Absa, Nedbank and Investec –  continue to dominate the banking sector despite an increase in competition.
According to the SARB, these five largest banks collectively hold 89.4% of the total banking sector assets (as at 31 March 2020). The remaining percentage is made up as follows:

  • Local branches of international banks – 7.0% of banking sector assets;
  • Other banks (Capitec, African Bank, and more recently Discovery Bank and TymeBank)  – 6%.

There was a small shift in percentage from March 2019 to year end March 2020, as the below image shows.

 

BORROWER COMPANY DEREGISTERED: WHO GETS THE OWNERLESS PROPERTY?
(approx 3-minutes reading)Deregistration of companies failing to comply with statutory requirements has become the order of the day, and the consequences of bona vacantia (ownerless property devolving to the State) is real. What will the consequences be if the company owes money to the bank? Recently, in Matjhabeng Local Municipality v McDonald and Others (19 February 2021), the municipality sought an order that those properties owned by the deregistered companies that also owed large sums in outstanding rates, be declared to belong to it. Not so, said the Court, as the decision remains with Treasury. Read a short summary of the judgment here.

 

UNSECURED LOANS ARE BITING BANKS
(approx 3-minutes reading)Unsecured loans are those instances where credit is extended by the bank without requiring collateral. Instead of relying on the borrower’s assets as security, the lender approves the loan based on a borrower’s creditworthiness. Typical examples are therefore personal loans, student loans, and credit cards.In recent news, our biggest banks have commenced warnings that they expect to report a substantial decline in earnings for the year ended December 2020 as they struggle with collecting repayments from unsecured loans they have granted. This is not really a surprise. Overall, operating conditions will remain weak for South African banks as it does with most sectors, due to the weak economy which has suffered further under the Covid 19 regulations. Banks are therefore wise to consistently applying good risk management policies. The low interest rates and government support measures should help contain the deterioration and keep non-performing loans at single-digit levels. WIN A R500 WOOLWORTHS VOUCHER WITH OUR Q&A AND FEEDBACKAnswer the Q&A and win a R500 Woolworths voucher
Leave a comment or request a specific discussion topic for future banker’s law email news