In the late 1990s 45 banks, mutual banks and homeland banks were operating in SA. That fell to a low of 18 by 2010, following a crisis of confidence in small banks. But the long hiatus since is over with the count of banks back up to 23 following a rush of new entrants. What will it mean for the marketplace? A look back at the last upcycle reveals a few things.

Bank registration rates follow regulator and market appetites. The last strong upcycle was in the mid-1990s when the new ANC government encouraged licensing to drive competition and the creation of black-owned banks. A raft of new investment banks had their eyes on lucrative government advisory contracts. Those that entered were focused on the fruits of restructuring — advising the government on how to raise funding and sell assets.

The wheels came off following the 1998 emerging-market crisis when interest rates soared to a high of 25.5%. The wave of defaults that followed led to a loss of confidence in small banks and funders abandoned them. Those that could liquidate their assets fast enough settled their liabilities and handed back their licences. Others were sold or put into curatorship.

The loss in confidence reached crisis proportions when Saambou collapsed in 2002 and BOE was forced into an emergency sale to Nedbank in 2003.

The fundamental problem is that many of the small banks had taken on too much liquidity risk — short-term deposits used to fund long-term loans. The competition for deposits was fierce, with high rates offered to attract both retail and corporate clients. At the first whiff of panic, those deposits could be pulled out of the banks fast, leaving them with a clutch of long-term loans and no cash to meet obligations.

Fast forward and deposits are clearly where the initial focus of new entrants is. While there are unique features of each, Discovery, Tyme Bank, Bank Zero, the refreshed African Bank and newly invigorated Sasfin need to raise deposits to begin financing their asset accumulation. All of them are funded by expensive equity or wholesale funding and deposits can reduce their average cost of capital to improve profitability. So Tyme is offering a 90-day fixed, 10-day notice account paying 10%. Sasfin is offering 8.8% on a 12-month fixed deposit. African Bank has the most aggressive offer with a five-year fixed deposit paying 10.75% a year. Bank Zero is promising “decent” interest when it launches later in 2019.

Between the last new banks phase and this one, regulation has changed dramatically. Basel 3 capital rules are more stringent in requiring banks to avoid large liquidity risks. The focus is thus much more on retail deposits, which are considered long term because they don’t run as quickly as commercial accounts. There is also much more pressure on banks to ensure their funding is longer term relative to their assets. So this new phase will be much safer than the last one.

Some of the new banks will have to build an asset pool from scratch. African Bank inherited a large loan portfolio from its collapsed predecessor, Sasfin has some books of asset finance and Discovery has a largish credit-card book from its previous joint venture with FNB, but the others are starting with nothing. They will start out cautiously, putting their excess cash into government and money market paper where it may be able to earn a very thin margin, and perhaps then test out unsecured loans or overdrafts.

Challenger banks

Some, like Tyme, are clearly focused on transactions from which they will earn some fees, though fees will be a major point of competition too. Tyme is emphasising its fee-free account and Bank Zero is likely to put its marketing energy on the same proposition.

A similar pattern has been seen in markets such as the UK, Germany and some US states where the new entrants are called “challenger banks”. Our challenger banks are already having an effect on the incumbents, which are responding on fees and deposit rates.

The new banks are promising to change the market not only through more aggressive pricing but also because of lower operating costs thanks to built-from-scratch systems. But those efficiencies will have to make up for other advantages the big four banks have, including distribution power and the large balance sheets they can wield in a market share war.

The last entry phase did achieve some diversification. By 2000 the big four plus Investec commanded 75.3% of domestic assets in the industry. By March 2019, those five banks held 90.6%. The only diversification in the past decade has been driven by Capitec, which entered shortly after 2000 and has managed to carve out 1.8% of the industry’s assets. But that means the big six command 92.4% of assets, a heavy level of concentration.

I can’t imagine that the market can accommodate the six existing large banks plus the four new entrants in the long run.

We can also expect PostBank to enter the market more aggressively at some point. Grobank (the repositioned Bank of Athens) and uBank could also launch new retail strategies. That makes the retail end of the market very crowded. Given the poor state of the economy, it is going to be very difficult for them to hew out a sustainable asset base that will provide the returns needed to cover their relatively high cost of funding.

While the precipitous collapse of the last entry phase won’t be repeated, some consolidation of the raft of new offerings will come in time.

• Theobald is chairman of Intellidex.