Some South African banks are beginning to ease corporate lending rates, and others could follow, seeking to curb a decline in their main business area by encouraging companies to borrow in the face of a sluggish economy and an electricity crisis.
Companies’ finances and expansion plans have been hit by weak consumer spending and frequent power outages, while the big mining sector has also been squeezed by lower commodity prices.
As a result demand for corporate loans has declined this year, hitting a business area that has been the mainstay of South African banks in recent years as they retreat from the high-margin but risky business of giving personal unsecured loans.
Earnings results from four of the largest South African banks in the past month showed a drop in their net interest margins – a measure of the difference between the interest they earn and the interest they pay out.
The combined net interest margin of Standard Bank, FirstRand, Nedbank and Barclays Africa shrunk to around 4.38 percent in first half of 2015, from 4.61 percent in the second half of 2014, according to a report released on Tuesday by PricewaterhouseCoopers (PwC).
“It’s a very sharp fall from the previous ones. I thought it would have been more gradual and it just shows how vulnerable banks are to regulatory changes and pricing,” said Johannes Grosskopf, Africa head of banking and capital markets at PwC.
Another reason for the decline is new Basel III global banking rules that force banks to hold more low interest-yielding assets such as government bonds.
Nedbank, Barclays Africa and FirstRand’s corporate and investment banking arm Rand Merchant Bank agreed to extend Pan African Resources’ revolving credit facility by over 40 percent to 1.1 billion rand ($81.7 million) in June. The refinancing reduced the interest rate, as well as the level of banking fees.
Meanwhile, Standard Bank and other institutions have agreed to refinance Tower Property Fund’s 475 million rand debt, which reduced rates by 87 basis points.
Bankers and analysts said they expected other lenders in the fiercely competitive South African market to follow suit and ease rates.
“It’s getting tougher and tougher to sell loans at profitable margins in this environment,” said one banker at a major South African lender who asked not to be named as he is not authorised to speak publicly.
“Depending on who you lend to, banks will have to reprice the loans to make them more attractive, especially if they are lending to South Africa corporates.”
The struggle facing the industry was underlined this month when the chief executive of FirstRand, South Africa’s biggest bank by market value, warned that weak demand for corporate loans would hit second-half earnings.
Harry Botha, an analyst at Avior Research, said while some banks had changed their loan offerings to make them more attractive for South African firms, lenders should now target companies from overseas.
“Banks can get a little bit more margin and can price a bit better by selling to companies with expansion ambitions into Africa. It’s bit more competitive than lending to South African corporates.”