PRESS RELEASE BY THE REGISTRAR OF BANKS ON THE 2005 ANNUALREPORT OF THE BANK SUPERVISION DEPARTMENT13 July 2006 The 2005 Annual Report of the Bank Supervision Department highlights four key messages, namely, 1.The use of information and communication technology systems by banks has increased dramatically in the past number of years, a trend that is likely not only to continue, but to grow. Therefore, some thoughts on the importance of such systems for the future viability and sustainability of banks are highlighted.2. During 2005, mortgage advances showed the strongest growth of the various types of credit. As house prices have risen, lending innovations, such as a wider array of loan products being offered to borrowers, have allowed more borrowers to obtain larger mortgages for varying purposes than in the past. In view of the innovative products, there has been some concern that banks’ mortgage-loan portfolios may be vulnerable to a possible rise in interest rates and, in some markets, a decrease in house values. Therefore, the Bank Supervision Department continuously encourages the implementation and maintenance of sound risk-management practices by banks, in order for them to keep pace with such risks as the banking cycle turns which was explained in detail in the 2004 Annual Report.3.In 2005, the South African banking industry saw regulatory approval being granted for the acquisition of a majority shareholding in ABSA Group Limited (ABSA), a bank controlling company, by Barclays Bank plc (UK) (Barclays). The transaction resulted in the first international ownership of one of the larger South African banks. In view of the importance of the transaction to the South African financial system, some thoughts on the implications of the transaction for the economy of South Africa and its banking system are highlighted.4.Taking into account the ongoing developments in banks, bankers are urged to take note of the need for proper succession planning and ongoing training of directors, to enable them to meet the demands placed on them. In chapter 1 of the report, the issues discussed include the following: -Overview of trends in the South African banking sector During 2005, the South African banking system remainedstable, and, in general, banks were sound and continued to benefit from South Africa’s economic health. Banks were well capitalised, and the average risk-weighted capital-adequacy ratio for the banking system as a whole was 13,3 per cent at the end of December 2005. Growth in the total balance sheet remained strong throughout 2005. By the end of December 2005, the total assets of banks – comprising, amongst other things, money, loans and advances, investment and trading position and non-financial assets – had increased by 12 per cent (measured over a period of twelve months), to a level of R1 677,5 billion (December 2004: R1 489,4 billion). Mortgage advances showed the strongest growth of the various types of credit. At the end of 2005, the five largest banks (one of which is internationally owned) represented about 89,6 per cent of the total banking sector, whereas small local banks constituted 2,2 per cent of total banking-sector assets, and other international banks constituted 8,6 per cent of the banking sector. Total non-bank deposits increased by 21,1 per cent over the 12-month period ended 31 December 2005 (December 2004: 20,5 per cent). The composition of non-bank deposits remained largely unchanged during 2005. Profitability indicators, however, declined somewhat during 2005. By the end of December 2005, the average return on net qualifying capital and reserves (smoothed) was 14,4 per cent, down from 14,7 per cent in December 2004, whereas the return on assets (smoothed) decreased from 1,2 per cent in December 2004 to 1,1 per cent in December 2005. The efficiency of the banking sector also started showing signs of a decline during the year under review, weakening from 63,9 per cent in December 2004 to 66,3 per cent in December 2005. Throughout 2005, South African banks maintained adequate levels of liquidity.