A RAFT of strategies would have to be applied by the big four banks to grow earnings and minimise the effect on return on equity of tougher Basel 3 rules, experts at global consultancy company Bain said yesterday.

Among these would be to define their appetite for risk and how it affected their capital across business units, and the amount of capital they allocated to them, said Fabrice Franzen, a partner at Bain's offices in SA.

South African banks are well capitalised, but would not comply with the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR), mostly owing to their lack of access to stable funding for their lending operations.

The LCR measures a bank's ability to withstand a sustained run on deposits with available liquidity for up to 30 days, while the NSFR measures the amount of stable funding a bank has over a period of up to one year.

Banking regulator René van Wyk said last week the banks had access to a short-term liquidity facility established at the Reserve Bank to enable them to plug any liquidity shortfall.

He said the NSFR needed a longer-term solution at a global level, as not only South African banks were unable to comply with this ratio.

Mr Franzen said tougher liquidity and capital rules could make it difficult for the big banks in SA to grow their return on equity, particularly in the face of tepid advances growth and rising costs. "It is going to be tough to grow return on equity going forward because of the high demand on them (to hold higher) regulatory capital and liquidity," Mr Franzen said.

"Banks will need to activate a set of strategic and tactical initiatives to mitigate the shortage in liquidity," he said.

In particular, they needed to ensure they had access to stable deposits while growing advances to expand net interest income, which has been subdued owing to low credit demand and the historic low interest rates.

An analysis by banks showed for example that loan growth between 2008 and last year had been slower than deposit growth, at 3% versus 5% a year, while the ratio between stable and volatile deposits had been fairly constant during the same period.

Mr Franzen said his reading of the decision of the liquidity fund from the Reserve Bank was meant to provide banks with a "breathing space" to restructure their funding models so they would not continue to rely on the central bank assistance.

"The scope of the facility is to support banks in the short term and to give them enough time to structurally adhere to the LCR requirement," he said.

Another Bain consultant, Andrea Oldrini, who is based in Italy, said the key to sustaining earnings growth would be to adopt risk-adjusted pricing of products and ensure balanced allocation of capital to business units and product segments.