Concerted bid to stop rate hikes goes awry
No sooner had Finance Minister Trevor Manuel said there was no crisis than FNB raised its rates, writes ANDREW GILL
ATTEMPTS by the Reserve Bank and Finance Ministry to delay a hike in commercial bank lending rates were dealt a cruel blow late on Friday when FNB joined Absa and NBS/Boland in upping its prime rate by 2%.
Of the five major banks, only Standard Bank and Nedcor were yet to move on Friday night, but are widely expected to follow early this week unless the Reserve Bank relaxes its monetary stance.
The Bank on Friday eased its key repo rate to 17% from 17.5% in an apparent effort to avoid further rate hikes.
But bankers said the move was insufficient and they would have to hike rates to salvage their interest rate margins.
In the past three weeks banks have been operating with virtually no interest margins - the difference between lending and funding rates - against normal margins of some 3% to 3.5%.
Absa and NBS/Boland on Wednesday both upped their rates by two percentage points.
Finance Minister Trevor Manuel on Friday evening told a news conference after a joint meeting with the Reserve Bank and Nedcor chief Richard Laubscher that the current turmoil was not a crisis and that he still hoped banks could hold out on hiking rates in the interest of economic growth.
But within two hours of the meeting, FNB moved.
Manuel said the meeting was not an attempt to hinder central or commercial bank independence, but rather to discuss issues of obvious mutual interest.
Banks have been under major pressure from consumers, labour and government not to raise rates for the sake of the economy.
Mike Vosloo, chief executive of Standard Bank, said Friday's cut was too small to stop his bank from raising rates.
"We need a 3% to 3.5% cut and it needs to come down sharply and swiftly if it is to stem an increase," Vosloo said.
"This is the third week of massive distortion. Half a percent on the repo rate does not change the nature of the beast," Vosloo said.
Analysts warned that any move by banks to an extended period of high rates would leave them facing a sharp rise in bad debts and could end up hitting the banks just as badly at earnings level as the current loss of margin.
"If you are talking three months of higher rates then the 2% they gain on margins could translate to 1.8% to 1.9% in losses on bad debts," said one bank analyst.
Moreover, the effect on economic growth could be disastrous.
The ability of Nedcor, Standard and FNB to hold out longer is based on their relatively lower dependence on interest rate margins than Absa and NBS/Boland.
Fleming Martin analyst Graham Bailey said that at 61% of business Absa was second only to NBS/Boland's 65%. Nedcor, Standard and FNB come in at 57%, 55% and 52% respectively, and thus were able to hold out longer before moving.
Bailey estimated the top four houses were shedding a combined R75-million to R80-million a week from their bottom lines before Absa raised rates.
"They could endure two weeks of it but when the third week came and it did not go away they had to look to recover some margin.
"But they are going to inherit a lot more bad debt. It is a lose-lose situation," said Bailey.
Reserve Bank general manager Bertus van Zyl told Business Times the cut in the repo rate did not signal a change in policy.
Deputy governor Timothy Thahane said long-term conclusions should not be drawn from Friday's cut in the repo rate.
executive of Standard Bank, said the cut was too small to be considered significant for his bank.
''We need three, three and a half percent. It needs to come down sharply and swiftly if it is to stem an increase.
He said Standard Bank had been funding its business at an average 19% due to the recent sharp rise in the repo, marginal and money market rates.
''This is the third week of massive distortion...Half a percent on the repo rate does not change the nature of the beast,'' Vosloo said.
He said increased bad debts would be a concern further down the line if interest rates did not return to pre-crisis levels.