Banks happy despite bad loans

The banking confidence index, released yesterday, showed confidence among banks remaining at 100 percent for the seventh quarter in a row.

However, banks also reported the biggest surge in non-performing loans in the past four years during the third quarter, as interest rates rose for the second time this year.

Anton de Souza, lead financial partner at Ernst & Young, said this might be due to the measures banks put in place to deal with changes in the economic environment.

“They have been more proactive than they have in the past,” De Souza said.

“As long as 15 months ago they started tightening their credit standards and they have been watching the quality of their book a bit more closely than in previous cycles.”

Banks have grown their lending books by record levels over the past year, responding to buoyant demand for credit. It is this demand that Reserve Bank governor Tito Mboweni has warned against while raising interest rates.

In the year to August, outstanding credit card balances rose 40,9 percent to R37,9bn, according to DI900 data submitted by the banks to the Reserve Bank.

New credit cards have been launched by SAA,, Virgin Money and Clicks, among others.

De Souza said although this level of growth was not sustainable, a |lot of it was coming from consumers who had previously not had |credit.

Ernst & Young said one reason for the strong confidence in the sector was increased income, due to higher interest income and buoyant non-interest income.

This was being driven by fee income due to higher transaction volumes, it said.

However, costs had also risen, due to increased provisioning for bad debts and more spending on staff and systems.

De Souza said spending on marketing and training was expected to start flattening out.

Higher interest rates typically took six to 12 months before they could potentially affect bottom-line profits.

Higher interest income earnings would likely offset any additional costs incurred from higher provision levels, he said.

Banks had factored in a further two interest rate increases of 50 basis points each this year.

A big rise in interest rates could be damaging but De Souza said this was unlikely to happen as the Reserve Bank had indicated it would implement orderly monetary policy change.

He said the large banks all had corporate and investment banks which were counter-cyclical.

This meant that as performance in their retail banks dipped, it picked up in corporate banking. – Business Day.

October 2006
« Sep   Nov »