Banks could boost economic growth by up to 0,5 percent by bringing their interest margins in line with international norms, says Plexus Asset Management`s chief investment officer Ryk de Klerk.
De Klerk says the sharp reductions in the repo rate (the rate at which the Reserve Bank lends to the commercial banking system) in the last few months have not been matched by cuts in banks' lending rates.
"Since its peak in August last year, the repo rate has fallen by some 7,6 percent, while bond rates have dropped by only 5,5 percent. This means that banks have in fact increased their interest margins, and therefore also their profitability, by about two percent."
De Klerk says at the beginning of 1989 interest margins in South Africa were more or less in line with international norms, but from 1989 to 1993 the banks widened their margins and since 1993 the banks have maintained an average interest margin of about 4,6 percent.
"When one considers the economic implications, these interest margins are cause for concern. The so-called rule of thumb of some of South Africa's leading economists is that a one percent increase in the prime lending rate and bond rate brings about a 0,2 percent drop in real economic growth, whereas real consumer spending declines by about 0,5 percent."
This implies that the increase in interest margins between 1989 and 1993 meant that economic growth was about one percentage point lower and consumer spending about two percentage points lower.
And, says De Klerk, a one percentage point change in lending rates and bond rates is estimated to add 0,6 percentage points to the inflation rate. "This means that inflation was actually about two percent higher during the period 1989 to 1993 owing to the increase in the interest margins of the commercial banks."
He says the time has come for the banks to weigh up their search for profits against the needs of the economy.
"If the banks reduced their margins to match international norms, they could make a substantial positive contribution to the economy which could result in economic growth improving by up to 0,5 percent, private consumer spending being stimulated and inflation being curbed further."
SCMB Asset Management director John Liackman says the environment for a significant reduction in interest rates looks better.
"Profit warnings from a number of retail companies whose sales are largely credit-based clearly demonstrate the growing pile-up of bad debts in the wake of high interest rates," he says.
"The banks should be particularly keen to lead rates lower in order to reduce write-offs."
"But," he adds, "while an interest rate reduction will help the economy bottom, lower interest rates alone will not drive growth. For real, sustained growth, South Africa is still dependent on a turnaround in the global commodities cycle."