The only possible threat South African banks face is=20 foreign competition.=20
Reg Rumney reports
Foreign competition is the biggest threat to the=20 margins of the banking industry — but foreign banks=20 are unlikely to want to upset the domestic applecart.
Alan McConnochie of broker Ed Hern Rudolph, writing in=20 accountancy firm KPMG’s 1995 Banking Survey, identified=20 foreign competition as one of three long-term issues=20 for South African banks.
The other two are the attitude of the Reserve Bank and=20 the government, and the co-operation on pricing between=20 the banks.
Whether banks can sustain wide margins between the cost=20 of borrowing and the cost of lending, essential for=20 good returns, depends on those three factors.
McConnochie said he did not see any threat from the=20 authorities. “We expect that the authorities will=20 encourage wide margins because without a strong banking=20 industry we cannot fund the economic growth required or=20 be an international partner.”
Nor did he see an end to the present banking focus on=20 products and services rather than rate-cutting. “Banks=20 learned long ago that nobody wins a price war.”
If foreign banks entered the South African market in a=20 big way, used cheap foreign capital to upset local=20 margins and buy market share, South African banks,=20 small by world standards, would have a problem.
But, he said, foreign banks were likely to concentrate=20 on getting good returns rather than undercutting local=20
Banks performed strongly in 1994, for the sixth year=20 in a row. Share price growth continued to exceed=20 earnings growth by a wide margin.
In 1994 the Banks Index jumped 30,3 percent (1993:37,5=20 percent) while earnings grew 13,4 percent (1993:15=20 percent). By comparison the Industrial Index rose by=20 25,5 percent and its earnings by 11,9 percent.
The banking sector, the survey noted, is dominated by=20 the big four commercial banks: Amalgamated Banks of=20 South Africa, Standard Bank Investment Corporation,=20 First National Bank Holdings and Nedcor.
Total banking assets grew by 16,9 percent to R343- billion last year, according to the survey. Advances=20 grew at a slightly lower rate at 16,3 percent, with=20 most of the growth coming from mortgage lending and=20 instalment finance. Mortgage lending grew 19,9 percent,=20 and instalment finance 19,4 percent=20
The survey notes the surge in mortgage lending is=20 supported by the low-risk weighting it carries for=20 capital adequacy purposes, and it is likely to see=20 substantial growth over the next few years as the=20 government and business try to provide housing to more=20
Overdrafts and loans to the corporate sector increased=20 by 15,5 percent for the year, indicating strong demand=20 for credit by business, said the survey, albeit lower=20 than the growth in mortgage lending.
“The level of retail lending remained virtually=20 constant showing weaker demand for consumer credit=20 other than instalment sales and mortgages.”
McConnochie expected the outlook for South African bank=20 profits this year to be fair. He reckoned the Banks=20 Index should show earnings per share growth of 20=20 percent, better than inflation although well below the=20 26 percent forecast for industrial shares this year.
He foresaw strong growth in banks’ credit advances and=20 fee income, reducing bad debts and a lower corporate=20 tax rate this year as well as a higher return earned on=20 “free” shareholders’ funds as interest rates continue=20 to rise.
These positive factors should more than make up for the=20 slight squeeze in the banks’ margins and a possible=20 increase in liquid asset requirements, said=20 McConnochie, as the Reserve Bank tried to slow the rate=20 of growth in bank lending=20
He noted that margins tend to widen at the bottom of=20 the interest rate cycle and narrow at the top.
McConnochie, writing before the increase in the prime=20 rate to 18,5 percent, said he did not expect banks to=20 slow the growth in advances to 10 percent as requested=20 by the Reserve Bank, so he believed a further one or=20 two percentage point rise in interest rates likely.=20