Press release by the Registrar of Banks on the Annual Report 2008 of the Bank Supervision Department2 July 2009 Contents of the Annual Report 20081. Chapter 1 The topics reviewed in this chapter include, inter alia, the following:1.1. Overview of trends in the South African banking sector Notwithstanding the turmoil experienced in international financial markets and the domestic cyclical economic developments during 2008, the South African banking system again remained stable, and banks were adequately capitalised and profitable. The banking sector’s capital-adequacy ratio increased from 11,8 per cent in January 2008 to 13,0 per cent at the end of December 2008. The tier 1 capital-adequacy ratio increased from 8,9 per cent at the end of January 2008 to 10,2 per cent at the end of December 2008.Total banking-sector assets increased from R2 663 billion in January 2008 to R3 170 billion at the end of December 2008. The year-on-year growth rate at the end of December 2008 was 24,5 per cent (January 2008: 27,0 per cent). Total assets of the four largest banks, amounting to R2 676 billion, accounted for 84,4 per cent of total banking-sector assets.Gross loans and advances increased from R2 103 billion in January 2008 to R2 316 billion at the end of December 2008. Growth in gross loans and advances (measured year-on-year) eased to 9 per cent at the end of December 2008, compared to 19,2 per cent at the end of January 2008.Banking-sector total liabilities amounted to R2 989 billion at the end of December 2008 (January 2008: R2 509 billion) and total equity amounted to R181 billion (January 2008: R154,4 billion). Deposits represented 79,6 per cent of total liabilities and the main contributors thereto were fixed and notice deposits (25 per cent), call deposits (22,1 per cent) and negotiable certificates of deposits (16,3 per cent). Deposits from retail and corporate customers remained the primary sources of funding and represented 63,2 percent of total banking sector deposits at the end of December 2008.Banks remained profitable throughout 2008, despite the turmoil experienced in international financial markets and the domestic cyclical economic developments. The banking sector’s cost-to-income ratio (unsmoothed) amounted to 42,2 per cent at the end of December 2008 (January 2008: 47 per cent). Return on equity (unsmoothed) amounted to 28,7 per cent (January 2008: 24,1 per cent) and return on assets (unsmoothed) amounted to 1,62 per cent (January 2008: 1,39 per cent).Liquid assets held by banks exceeded the statutory liquid assets requirement throughout 2008. The liquid assets held, measured against the minimum liquid asset requirement, amounted to 115,5 per cent at the end of December 2008 (January 2008: 111,1 per cent).The increase in interest rates, other cyclical economic developments in South Africa and the turmoil experienced in international financial markets contributed to credit risk ratios deteriorating during 2008. Impaired advances increased to R87,3 billion at the end of December 2008 (January 2008: R47,6 billion). Impaired advances as a percentage of gross loans and advances deteriorated from 2,3 per cent at the end of January 2008 to 3,8 per cent at the end of December 2008.Concentration in the South African banking systemThe level of concentration in the South African banking sector, measured using the Herfindahl–Hirschman Index (H-index) amounted to 0,189 at the end of December 2008 (December 2007: 0,190). The H-index remained high in 2008 due to the continued dominance in terms of market share by the four largest banks.1.2. International Monetary Fund Basel II assessment South Africa implemented Basel II with effect from 1 January 2008. During the course of 2007, the IMF approached the Department with a request to conduct a pilot study on the South African implementation of Basel II. The pilot study comprehensively covered the entire Basel II implementation process, and included visits to three banks and meetings with an auditing firm and a rating agency.The purpose of the pilot study was twofold in that it serv