OBG talks to Jim Cowles, CEO for Europe, Middle East & Africa, Citigroup

Jim Cowles, CEO for Europe, Middle East & Africa, Citigroup

Interview: Jim Cowles

To what extent will stricter regulatory controls negatively impact liquidity in the long term?

JIM COWLES: The global financial services industry saw a tightening of regulations following the 2008 financial crisis. Prior to the downturn there were many banks with too much leverage, and we are now seeing the introduction of measures such as the Basel III capital requirements and liquidity ratios to avoid a repeat of the situation. This is positive as it brings more discipline to the industry and signals to banks that they have finite resources and must allocate them more strategically, prompting differentiation among them. But we must understand that there are trade-offs and consequences. There will be a degree of consolidation as marginal players will be unable to meet new compliance costs. This isn’t necessarily a bad thing, as they tend to compete on price rather than better service or value. And by competing on price, they are either mispricing risk or selling a product below the cost of delivery, which is unsustainable.

In terms of trade-offs, greater safety in financial institutions means less flexibility in activities such as providing additional services, products, credit, etc. As we move towards liquidity ratios that provide more confidence in the system, we potentially end up with greater stability at the cost of flexibility. Thus, to the extent that it is desirable for an institution to have a greater degree of liquidity, the new rules may spur banks to hold more corporate or government bonds, which could mean they make fewer loans, impacting economic growth. At the same time, if an institution is perceived to be safer, with a higher equity base, the overall cost of capital can come down and the bank can provide cheaper products and financing.

The South African financial services industry is one of the world’s best regulated, and most bank activity is on the balance sheet, which is why local banks were resilient during the global crisis. South African banks are well capitalised to meet Basel III capital requirements, but will face challenges around the liquidity coverage ratio and net stable funding ratio. About 30% of assets of South African banks are long-term mortgages and 60-70% of funding comes from the wholesale market, which is mostly short term. This could result in a structural liquidity gap in the long term, which may lead banks to lengthen maturities.

What scope do you see for project financing?

COWLES: For developed and emerging markets alike, project finance is always relevant. In Europe it is about maintenance of, and reinvestment in, infrastructure, whereas in Africa there is a need to build transport and power infrastructure. The overall economic growth of a country is dependent on its ability to build infrastructure, which requires capital from foreign direct investment, government agencies, insurance companies, pension funds and banks. South Africa has infrastructure projects in the pipeline, with pools of liquidity available; however, the challenge is taking the projects from conception to the bankable stage. The government can play a role by providing a degree of financial assurance and reducing risk profile of a project to entice parties to join at the earlier stages.

What do you forecast for corporate lending growth over the next 12 months?

COWLES: The demand for credit, whether corporate or individual, is usually correlated to economic development. Looking at South Africa’s macroeconomic environment, low growth of 1.9% in 2013 and rising inflation near the 6% top band has limited lending. Corporates are quite liquid at this point and won’t demand credit, but there is scope for lending to small and medium-sized enterprises (SMEs). While this can be provided by local retail banks that use deposits as a cheap source of funding to offer attractive lending to SMEs, foreign banks can also play a role through supply chain financing by working through large corporates to provide credit to their suppliers at a cheaper rate than what is offered via general borrowing.

Anchor text: 
Jim Cowles

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The Report: South Africa 2014

Banking chapter from The Report: South Africa 2014