‘Lower interest rates won’t hurt bank profits’

Lower interest rates will not hurt South African banks’ profit margins in the long term, a study by global business advisory andauditing firm Ernst & Young has found.

Released on Monday, the study, Financial Services Operators in a Low Inflation Environment, investigated the effect of a long-term decline in inflation rates on the South African banking industry’s profit growth path.

Ernst & Young Financial Services partner Rakesh Garach asserts that while the 550 basis-point decline in interest rates last year will likely lead to banks facing a margin squeeze in the short term, this should be reversed once interest rates stabilise at current levels.

According to Garach, real disposable income gains have been made in the past few years and this should help banks to grow their advances books in a lower interest-rate environment.

The study found that although lower inflation and interest rates should boost bank earnings due to higher volumes, this will likely only be an initial spurt because the consumer psyche will adjust to lower interest rates and the need for debt will decrease. — I-Net Bridge

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