Donna Block
After years of fat margins and record profits, South African banks are now crying poverty.
In the wake of the recent volatility in the worlds financial markets, commercial banks have seen their profits squeezed by a plunging rand and the Reserve Banks desperate attempts to stave off international speculators by hiking the repo rate to a 13- year high.
Its the consumer who hurts the most, however, as the pain is passed on by the banks, who claim that their higher costs mean higher interest rates. With no end in sight to the rands troubles, the high cost of banking is likely to be with us for a while.
But while its true that the financial sector has been in the front line of the speculative assault and has taken direct hits, the fact is that South African banks operate some of the widest bank margins in the world.
Interest margins are what fuel South African banks. The interest margin is the difference between what the banks charge their customers and the actual cost of a loan to the bank.
Whereas in many other countries, particularly in Western Europe and the United States, banks derive their profits from a wide range of investments and business deals, as well as their loan portfolio, banks in South Africa get the bulk of their money from interest revenues. That is why local banks say their wider margins are not only justified but crucial for their commercial survival.
Before the latest round of speculative chaos hit South Africa, bank margins were more than 4% against an international norm of 3%. Even when comparing the margins with other emerging markets instead of with First World countries (whose margins are about 2,5%), South African bank margins are still on the high side.
Korea and Singapores margins are in the 2% range, Malaysia in the 3% range and Thailands, in line with South Africas, about 4%, although that may soon change as a result of Asias economic troubles.
South Africas five biggest banks Absa, NBS Boland, Standard, Nedcor and First National Bank say they have higher margins because they have to endure higher risks that First World banks dont have to face.
These include everything from a high incidence of bank robberies and cash-in- transit heists to the absence of a tradition of saving and a growing number of bad debts.
In addition to these problems, banks have borrowed heavily in recent weeks as the rand plummeted.
Since May 21, when the rands slide began, banks have borrowed R19-billion at the penalty rate. Money has a price, and the price of money has gone up, said Claire Gebhardt-Mann of the Council of South African Banks.
The banks also say they face political pressure to provide services in parts of the country where normally they would not because there is not enough business to cover their costs.
South African banks also have high costs ratios because of their large branch infrastructure and increasing staff and technology costs.
Some have also been too reliant on margin income as their main source of revenue. Absa, the countrys largest bond provider, earned 62% of its total income from interest revenue in its latest financial year. NBS Boland earned 64%.
Many analysts wonder whether these wide margins are necessary, considering that South Africas banks have lived the good life for so long. Could the banks have bitten the bullet, eaten some losses and kept their interest rates down in the short term while waiting for the markets to settle?
One American broker who specialises in South African financial markets said that the rate hikes were unwarranted as the banks hadnt been squeezed long enough to justify the increases. They [the banks] should have some sense of civic responsibility, he said.
James Heinz of the National Labour and Economic Development Institute, an independent think-tank closely linked to the Congress of South African Trade Unions, agrees. There is evidence that the banks are doing well, he said.
Besides, they are not the real risk bearers in this at all. Its the people dependent on the productive sector for their livelihoods, the wage earners and the unemployed who are at the greatest risk.
According to a report by Mark Young of the international financial rating agency Fitch IBCA, there are a number of ways banks can protect themselves against risk other than relying on big interest margins.
One way is to operate more like First World banks by diversifying banking portfolios to include more revenue generating investments. Another way, which would be of particular use to South Africas banks, is to reduce overhead costs and increase efficiency.
One banking analyst says that South African banks are less efficient than their counterparts in other parts of the world and their retail base is spread very wide. But in the short term, banks are unlikely to address these problems and will continue to rely on their margins.
Compared to other emerging market economies hit by the current crisis, South Africa is faring better than most. The countrys financial sector still has a long way to go in figuring how to cope with the volatility.
But as far as most South Africans are concerned, living with high banking margins, like living with high crime, is a reality we all have to accept.