South Africa’s big four banks are under pressure to maintain revenue while concern continues to grow of an unsecured lending bubble. However, the banks are unlikely to shift away from non-interest income, which makes up a bulk of the unsecured lending market, as the current environment favours higher fees and commissions from these products.
This trend is likely to continue into 2013 if interest rates remain low and according to Gary Palmer, CEO of Paragon Lending Solutions, non-interest income makes up a significant portion of most banks’ revenue. “The banks are attributing higher fees and commissions which are linked to initiation fees, administrative expenses and credit life insurance in order to steady revenue growth.
“For example, Nedbank’s recent third quarter results illustrate growth in non-interest revenue up 14% to R12.4 billion, indicating that they are on target for this year.”
According to the PwC’s South Africa Major Bank’s Analysis survey, insurance and bancassurance income – the selling of insurance and banking products through the same channel – experienced high levels of growth, and although it is attributed to steady premium increases and stronger cross-selling, Palmer says the banks are using these non-interest, insurance services and innovative products to draw in the unbanked and increase their revenue streams.
“The banks are under pressure on many levels. Low interest rates put pressure on their margins; banks are facing increased costs for funding; bad debt is increasing, and high operational and funding costs will all continue to apply pressure.
Furthermore, Palmer says, “South Africa has a 48% banked penetration rate so there is enormous potential for banks to draw in on those who are not in the market.” The Banking Association estimates that the unbanked have R12 billion stashed ‘under mattresses’ across the country.
Palmer says that because SA’s major banks do not profit as much as they did pre-2008 from asset-based lending, non-interest revenue will remain the banks’ priority until the economic climate improves and property investors will continue to endure lengthy waiting periods if they require asset-based finance.
“Banks are keen to lend against residential property as long as it is for primary use. However, there is limited appetite to lend against residential investment properties. Commercial property investors can obtain bank funding, but only if there are signed leases with blue chip tenants.”
As a result, Palmer suggests that property investors and developers need to explore alternative resources like second-tier lenders. “Investors should be aware that it can take the bank two to three months to process a loan.
“Second-tier lenders afford client’s access to short-term liquidity without pressure while waiting to secure long-term financing from a commercial bank, thus alleviating short-term financial concerns when liquidity is required and while the bank’s struggle to release finance,” Palmer concludes.