A comment we have heard more than once when discussing RSA Retail bonds is:

“I’d rather give my money to Old Mutual than to the Government – the Government is likely to steal it”

It is hard not to be discouraged by much of what is going on politically and with our state institutions, but it is important to understand the likely effects of this behaviour:

  • The willingness and ability of the State to service its local debt will remain very strong, and certainly stronger than the other local borrowers (e.g. Banks, State Owned Enterprises and Corporates)

  • Money placed with Old Mutual, or any other money manager is typically invested on the investors’ behalf with these same borrowers, i.e. the manager is simply a conduit through which the money flows to the Government, Banks and Corporates.

So, even though we may not trust our politicians, we have no doubt that Government issued debt remains the safest of all interest-bearing debt in South Africa.

Furthermore, RSA Retail Bonds are the safest bet of all because they are only issued to retail savers – and retail savers are always the first to be paid should problems arise.

Moral stands are to be encouraged, especially in SA.  By all means, invest via a money manager if you believe they will get you better performance – but to do so because you believe the money to be inherently safer than investing in Government bonds is incorrect.

For those interested in more discussion about credit risk, and how to invest safely in the SA deposit market, please read on.

Who should you invest with and how likely are they to pay you back?

When it comes to deciding how to invest your money (we are talking about savings accounts here, rather than equity or other growth type investments), the likelihood that you will get the money back is of prime importance.

There are professional rating agencies (Moody’s, S&P, Fitch) who look at the credit worthiness of various borrowers.  While these agencies don’t have a great track record when it comes to identifying problems, they do provide a useful framework for comparing different borrowers.  The table below gives a current summary of the current ratings SA Government and major SA Banks – the comments are ours.

 

Issuer RatingDescriptionComments
SA Government
AAA

Capacity to meet its financial commitments is extremely strong

Governments can and do fail, and SA certainly has some issues at the moment, but for Governments to default on locally issued debt is almost unheard of

ABSA, FirstRand, Nedbank, Standard BankAA-

Capacity to meet financial commitments is very strong – just a small degree lower than AAA

Too Big to (be allowed to) Fail

Investec
AA-

Capacity to meet financial commitments is very strong – just a small degree lower than AAA

Probably Too Big to (be allowed to) Fail

CapitecA

Capacity to meet financial commitments is still strong – but more susceptible to the adverse effects of changes in circumstances and economic conditions

Probably not Too Big to (be allowed to) Fail

Just because banks may not be allowed to fail does not mean that depositors will not face some losses.  Post the 2008 Financial Crisis,  regulators worldwide are trying to ensure that the burden of future bank defaults does not fall on the tax payer. Steps are being taken to “bail in” depositors and bond holders should banks get into trouble.

Aren’t my bank deposits guaranteed?

Many countries have deposit guarantee schemes, but at the moment SA doesn’t.
This is however under consideration, and this Mail & Guardian article does a good job of explaining what is planned and where the process is currently.

A summary of the article:

  • In the past, with no explicit insurance scheme in place, the government has compensated depositors with failed banks on a case by case basis. The Reserve Bank stresses however that this implicit guarantee “…does not mean 100% coverage”.

  • Past bank failures involved small institutions and the Government could afford to cover depositors – e.g. after the collapse of African Bank, the Reserve Bank covered losses on deposits totalling R100-million.  These were retail deposits – wholesale depositors and bond holders faced some losses.

  • Cover of up to R100 000 is proposed per depositor (per bank) and is intended primarily to cover retail depositors and small and medium enterprises (SMEs), and would include current accounts and fixed-term deposits and notice accounts.

  • Deposits not covered are those made by the non-bank private financial sector – Money Market and other Unit Trusts, Insurers, Pension Funds and Fund Managers.

Some Rules of thumb for Savers:

The best defence against losses should borrowers run into problems has been shown to be a “retail investor”.  So, try and stay retail, or at least recognise the consequences of not being retail.

Bank Deposits

Retail

RSA Retail Bond

Retail

Money Market Fund

Not Retail

Bond Fund

Not Retail

Your savings are too important for anyone but the highly rated borrowers to get your money:

  • For individual savers, it is very rarely worth taking on extra credit risk for marginal increases in the interest earned.  For example, if a lower rated bank is paying 1% more for a 1 year deposit, while the additional 1% may be attractive, should there be a default, you would have to earn 1% extra for 100 years to make your capital back – and that’s ignoring inflation

  • The yield offered usually gives you a good idea of the risk involved – if it is too good to be true it probably is

The rates offered by banks do vary, and sometimes significantly.

  • Negotiate: Retail deposits are important to banks, so make use of other bank’s rates and push hard for a better deal from your bank

  • If your bank cannot offer you the same or better, then be prepared to open an account with the other bank – it is getting easier to open accounts

See BondClub Market Data for our comparison of rates available at the different banks

BondClub Market Data

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