Latest trading updates from three of SA’s largest banks demonstrate their resilience in an economy that is taking strain. But they also hint at the extent to which rapidly rising interest rates are a mixed blessing for the banks.
The domestic economy has had a roller-coaster year with a better-than-expected first quarter, a contraction in the second quarter and another better-than-expected third quarter. Despite floods, load-shedding and a rapidly deteriorating global picture, the rebound from Covid-19 has continued, tourism and agriculture are doing well for SA, and economists now expect the economy could grow at 2% or better for 2022.
However, with global inflation and interest rates soaring, local interest rates have been hiked by 350 basis points for the year to date to a level now higher than it was before the Covid-19 pandemic. Inevitably, higher interest rates must take their toll on household finances, as well as on the financial positions of businesses. That will translate into higher bad debt ratios in the coming months.
In addition banks have to hold large quantities of capital to meet regulatory requirements and some is in interest-earning securities, which may also earn more when rates rise. Bankers talk about this positive “endowment” effect, which drives up net interest income when the Bank raises interest rates.
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