SA banks defend margin between prime and repo

SOUTH African bank executives have tried to justify their interest rate policies after Reserve Bank governor Tito Mboweni criticised the 3,5 per cent margin between the central bank’s official repo rate and the benchmark lending rates of the commercial banks.

The repo rate is 8,5 per cent, while banks’ prime and mortgage rates are 12 per cent.
After publication of the central bank’s monetary policy review last week, Mboweni asked retail banks to reconsider the spread between the repo rate and prime rates.
Sim Tshabalala, the chief executive of Standard Bank South Africa, said on Friday: ‘It is perfectly acceptable for the central bank to try to persuade bankers to conform with its goal. But we need to repay deposits when they fall due, while our loans may last up to 20 years.’
To provide for this mismatch between assets and liabilities, banks had to attract long-term funding. Tshabalala said Standard Bank had total liabilities of N$608 billion and borrowed only N$2 billion to N$3 billion at the repo rate. The bulk of the funding was raised in the wholesale market – from corporate treasuries and institutional investors – which was ‘significantly more expensive’.
Tshabalala pointed out that the margin was not pure profit; it included the cost of capital, operations and risk.
Ian Cruickshanks, the head of strategic research at Nedbank Capital, said the prime benchmark rate for customers was misleading because banks used it only as a point of reference.
‘It’s a misnomer to call prime ‘prime’. Until the end of last year, banks were lending at up to two percentage points below the benchmark rate,’ he said.
First National Bank chief executive Michael Jordaan did not want to comment.
‘This is an industry issue and the Banking Association (of South Africa) will be taking it up directly with the governor,’ Jordaan said.
One banker said that about 65 per cent of bank funding came from the wholesale market and 25 per cent from retail. Ten per cent was from share capital and similar sources.
Stanlib research head Nigel McKenzie said that local banks earned half their income from interest revenue. The rest came from fees and commissions, investment income and trading.
But he said interest income ‘is likely to be lower going forward, because asset growth is falling and the margin between interest paid and interest earned is being squeezed.
‘For the industry, I would expect the interest portion could go towards the 45 per cent level, depending on the extent of the economic slowdown and movements in interest rates.’
Five to 10 years ago, the net interest income portion would have been about 60 per cent, he said, but banks had ‘successfully broadened their revenue streams away from pure lending and deposit taking activities’.
-Business Report