Bank margins too low, say experts

BANKERS, generally perceived as fat cats and often accused of collusion, drew strong support from banking analysts last week in the row with South African Reserve Bank governor Tito Mboweni over their margins.

Banks currently pay 8,5 per cent when they borrow from the central bank to meet their daily liquidity needs, while their benchmark prime rate for loans to clients is 12 per cent.Mboweni believes that the margin of 3,5 percentage points is too high.According to Kokkie Kooyman, the global fund manager at Sanlam Investment Management, margins in South Africa are considerably narrower than in comparable emerging market countries.Neville Chester, a portfolio manager at Coronation Fund Managers, said banks’ margins had been too low because they granted mortgage loans at up to 1,5 percentage points below the benchmark rate. Mortgage loans represent about 60 per cent of banks’ total loans.Kooyman made another important point: bank lending rates are falling faster than their cost of funding.Rates on mortgage loans, by far the biggest part of banks’ business in terms of value, are repriced immediately, while much of their funding is on term deposits and those rates are locked in for varying periods at higher levels.The repo rate has been cut by 3,5 percentage points since its peak in December.The Reserve Bank’s monetary policy committee will meet this week to decide whether to leave the repo rate for another month, or cut it further.A comparison of South Africa’s margins with those in other countries shows the former are modest.Michael Power, an investment strategist at Investec Asset Management, described UK margins as ‘obscenely high at the moment – and that is when they are lending.’Some are around seven percentage points. They are using cheap money from the Bank of England to recapitalise.’The UK central bank has dropped its overnight rate to an historic low of 0,5 per cent.UK banks, like those in the US and Europe, have been hit by huge losses relating to defaults in the US subprime mortgage market.Some banks were taken over by governments, while others received state and central bank assistance to stay in business.They are now lending cautiously and are widening their margins to rebuild capital after a series of write-downs due to the credit defaults.However, traditionally, margins in advanced economies are lower than those in emerging markets because the risk profile of borrowers is perceived as lower.So a more valid comparison is with peer countries.Kooyman compared local margins with those in Brazil, Peru, Uruguay, Turkey and Indonesia, ‘where they average between five percentage points and 11 percentage points’.Widening margins globally reflected problems in the world banking sector, he added. -Business Report