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Friday Sep 02, 2011

Banks' interest income continues to decline

Over recent weeks, the big four SA banks have released their financial results for the first half of 2011, further confirming that a larger focus has been placed on non-interest income such as trading income, fee income and commissions, and less focus placed on interest income.

The discernible change in South Africa's economic landscape has been a driving factor in the banks shifting their revenue mix.

Data shows that Nedbank has placed the largest focus on non-interest income, with results for the first half of 2011 showing an increase of 15.9% on the first half of 2010.

First Rand recently reported an 11% growth in non-interest income and ABSA and Standard Bank reported a growth in non-interest income for the first half of 2011 of 10% and 6% respectively (compared to the same period in 2010).

This shift, coupled with the current volatile state of the economy, has made it increasingly difficult for investors to borrow from banks, thus spurring them to seek alternate sources of finance.

Comments Gary Palmer, CEO of Paragon Lending Solutions, "This data confirms that this is not a once off occurrence and that a trend is emerging whereby banks are placing much more focus on non-interest income, and moving away from interest income (lending)."

"What we have noticed is that credible investors are finding it much more difficult to obtain funding from the banks, and are therefore looking at other alternatives, such as second-tier lenders."

This trend is already evident in international markets says Palmer. In the US, the commercial banks' lending has been declining for years. Deregulation and new technology have eroded banks' comparative advantages and made it easier for nonbank competitors to enter these markets. The same trend is present in Europe. In July, the European Central Bank (ECB) reported a non-interest income increase of 36.1% for three months ending 30 June 2011, compared to the same period in 2010.

Palmer points out that essentially, the banks are seeking ways of achieving additional income, and the cost to the bank of earning interest income is higher than non-interest income. This, coupled with the fact that bad debts are at their highest levels in many years, has caused the banks to focus more on recovery from existing loans as opposed to building their lending books.

"The banks are no longer generating enough profit from lending, and are thus attempting to acquire new ways of earning income", says Palmer. "Their focus has shifted from direct lending to growing trading income over the short term".

According to Palmer, "this distinct shift in the banks revenue mix can be attributed to a number of reasons, including the impact of low interest rates on bank's earnings, the global financial and credit crisis, the increased level of bad debts and the introduction of new legislation. These factors have incited banks to seek alternative ways of earning income, with lending no longer proving as lucrative as it did for the banks pre 2009".

A key encumbrance for the banks has been the current low interest rate environment, which is damaging the banks' margins. The credit crisis has simply resulted in a lack of liquidity. "Despite South Africa not being as severely affected as other countries, this lack of liquidity has severely influenced the willingness of banks to lend, as wholesale funding has reduced dramatically", he adds.

Paragon Lending Solutions Press Release


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