A property and financing expert says that local banks should think about lowering their profit margins to absorb some of the Reserve Bank’s interest rate increases.
Last week, the South African Reserve Bank hiked rated by 50 basis points, taking the repo rate to 6.75% and keeping the banks’ prime rate at its constant ratio at 10.25%.
“This is the first time the prime/home loan rate has reached double digits since 2010, and it is a scary prospect for all SA consumers, not just the many prospective home buyers who will now be forced to put their plans on hold because they can no longer qualify for a home loan,” said Rawson Property Group’s MD Tony Clarke.
He said that most households in the country are already spending more than 75% of their take-home pay on debt repayment, while the latest increase could see consumers snap.
“The increase will also naturally have a negative effect on the real estate industry, as first-time sales start to dry up, upgrading plans are abandoned and the number of existing owners going into foreclosure rises. But the implications will be far wider than this. Quite simply, economic growth will stagnate and everyone in SA will be poorer,” Clarke said.
Where are the banks in this?
Clarke said that Rawson had hoped that when the Monetary Policy Committee raised the repo rate, the commercial banks might somehow see their way clear to absorbing the increase by deciding not to raise the prime rate. “This obviously did not happen,” he said.
The difference between the repo rate, which is the rate the Reserve Bank charges the banks, and the prime rate, which is the basis on which banks charge consumers to borrow money, has remained unchanged at 3.5 percentage points for manyyears.
“No-one really seems to be able to say why, or why it does not change as it does in many other countries,” he said.
Rawson pointed out that in the US, for example, the average differential is approximately 3 percentage points, although it can and does vary from bank to bank.
In the UK, the prime rate charged by most banks has for sometime been the same as the repo or official bank rate and in Australia, the differential currently ranges from about 2% on home loans to about 4 or 5% on car finance and other short-term borrowing.
South African repo rate v prime rate 2005 to 2015
|Date of change||Repo rate||Prime rate||Difference|
Clarke said that local banks can be expected to have three arguments against narrowing the differential:
- The first is that the prime rate is only an “indicator” and that some borrowers are already charged a lower rate.
“But to this we would reply that there are probably actually very few borrowers in this category, because they would have to be extremely low-risk customers, and there are not many of those around with the economy in its current state.”
- The second argument the banks are likely to make is that they have to think about savers as well as borrowers – and that they can’t afford to pay savers as much if they are charging borrowers less.
- The third is likely to be that they have to protect their shareholders, who expect them to keep making the good profits they have been showing for the past few years.
Rawson noted that at the end of 2014, Standard Bank profits were up 15% for the year at just over R18 billion, while Absa (Barclays Africa) reported pre-tax profits of approximately R13 billion.
“And that is really the heart of the matter. As it is, savers are getting very poor rates on bank savings accounts, which often don’t even keep up with inflation, and we would of course not want them to get any less,” Clarke said.
“But shareholders who are smiling as banks keep making huge profits should ask themselves whether that situation is likely to continue when high rates start to discourage large numbers of borrowers and the banks no longer have as many customers.
“Might it not be better to cut the differential between the repo rate and prime somewhat, and hope to boost the number of customers?”