Press release by the Registrar of Banks on the 2006 Annual Report of the Bank Supervision Department26 June 2007The 2006 Annual Report of the Bank Supervision Department highlights five key messages, namely:1.All financial institutions are equally concerned about disruptions to business continuity – a state of continued, uninterrupted operation of a business. Therefore, some views on business disruptions and business continuity planning are highlighted in the introductory section of the report.2.In 2006 the Basel Committee on Banking Supervision published a revised version of the document titled Core Principles for Effective Banking Supervision, commonly referred to as the Core Principles. Banking supervisors as well as the IMF and World Bank use the Core Principles to assess the quality of a banking supervisory system, identify any weakness that may exist and to determine the way in which the major sources of risk to such systems are being managed. The Bank Supervision Department (Department) performed a self-assessment of compliance with the revised Core Principles.3.The Department continued to monitor corporate-governance practices of banks during 2006, focusing mainly on the induction and development of directors. It was found that banks’ induction and training programmes diverged significantly and, therefore, the Department encouraged banks to make use of a director development programme that was introduced by a local tertiary institution.4.All parties involved in and impacted by the implementation of the new Capital Accord (Basel II) on 1 January 2008 have intensified their preparation efforts. Legislation required for effecting Basel II implementation is at an advanced stage and will be considered for approval during 2007. 5.The Department is of the opinion that all banks have made good progress in the implementation of anti-money laundering and combating the finance-of-terrorism measures. The Department continued to foster a close working relationship with the Financial Intelligence Centre in the interest of ensuring a high level of value added by the banking industry to the attainment of international best-practice requirements. Chapter 1 of the report discusses, inter alia, the following issues:- Overview of trends in the South African banking sector During 2006, the South African banking system remained stable and banks were adequately capitalised, with the banking-sector capital-adequacy ratio remaining in excess of the minimum requirement of 10 per cent. The capital-adequacy ratio decreased from 12,7 per cent in December 2005 to 12,3 per cent in December 2006. Total balance-sheet growth remained strong during 2006, but eased towards the end of the year. By the end of December 2006, total banking-sector assets had increased by 23,7 per cent (measured over twelve months) to a level of R2 075,1 billion (December 2005:R1 677,5 billion). The five largest banks constituted 89,7 per cent of the total assets of all banking institutions as at the end of December 2006 (December 2005: 89,6 per cent).Non-bank deposits remained the main source of funding for the banking sector and constituted 65,2 per cent of total liabilities (2005: 65,7 per cent). Total non-bank deposits increased by 22,9 per cent (measured over twelve months) amounting to R1 353,2 billion, compared to the 21,1-per-cent growth in December 2005 (R1 101,5 billion). The composition of non-bank deposits remained fairly stable during 2006.Profitability ratios improved throughout 2006. By the end of December 2006, a return of 18,3 per cent on net qualifying capital and reserves (12-month smoothed average) was reported, compared to 15,2 per cent in December 2005. Return on assets (12-month smoothed average) amounted to 1,4 per cent at the end of December 2006 (December 2005: 1,2 per cent). The banking sector’s efficiency ratio displayed steady improvement, breaking the 60-per-cent level to end the year under review at 58,9 per cent (December 2005: 66,3 per cent).The banking sector maintained an adequate amount of liquid assets during 2006, exceeding the stat