Rate hikes hit banks' income
April 24, 2007
By Mzwandile Jacks
Johannesburg - South Africa's retail and investment banks had experienced a slowdown in income in the first quarter as last year's rate hikes meant they would have to reprice all deposits, the Ernst & Young banking confidence index disclosed yesterday.
Anton de Souza, a partner at Ernst & Young, also attributed the "margin squeeze" to a surge in the competitive push for retail deposits as the savings market declined and the banks had to pay "considerably more" to depositors to attract retail money.
But the outlook for these banks remains favourable. De Souza said that provided interest rate hikes did not dent consumer spending too sharply, the banks should be in a position to continue benefiting from strong economic growth prospects.
"Though the National Credit Act takes effect in the second half of this year and will have an impact on revenue flows in the lower-income segments, this is unlikely to impact too negatively on the retail environment," he said.
Although there is strong demand for corporate debt as South Africa prepares for the 2010 soccer World Cup and builds up infrastructure capacity, the competition to finance these projects has often become very intense.
"The rates that corporate entities can negotiate often mean that the margins are pushed to the bone. The pressure of lower interest and fee income for investment banks, coupled with high expenditure, resulted in a strong fall in net profit growth," De Souza said.
Retail banks were able to shrug off this pressure and continued to report growing net profits, he said. "But should margin squeeze and lower fee income continue, it is only a matter of time before slowing net profits result."
Investment banks reported a decline in net profits after tax. Their operating expenses have risen on the back of strong growth in employee numbers.
"Investment banks have not faced rising non-performing loans and it is unlikely they will face these for a while yet. Unlike their retail banking peers … corporate entities are less interest rate averse," De Souza said.
Ernst & Young did the research for its financial services index in collaboration with the Bureau for Economic Research at Stellenbosch University.
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