SOUTH African banking stocks have come under pressure since the surprise decision last week by the Reserve Bank to cut lending rates in the country

The interest rate cut was largely due to growth concerns triggered by the European sovereign debt crisis.

The rate decision "reduces the bank's interest income ... It will have a negative impact on their near-term earnings," said David Danilowitz, an analyst at Nedbank Capital, on Monday.

Since the rate decision on Thursday, the JSE banking index has lost 2,4% by mid-morning trade on Monday, led by close to 3% declines in FirstRand and Standard Bank. Absa, the country's biggest retail lender, had fallen 1,8% and Nedbank, the fourth-biggest bank, was down 1,7%.

Slowing inflation has given policymakers in emerging-market countries such as South Africa the room to focus on boosting slowing growth.

The Reserve Bank cut its forecast for growth to 2,7% for the year, the slowest since a recession in 2009.

The only question about the decision to cut rates was whether there would be any positive effects, such as improvements in economic activity and specifically borrowing in the medium to longer term, Mr Danilowitz said.

At 11.23am, Absa was trading 0,7% lower at R136,58. Standard Bank was down 0,4% to R110,26, FirstRand 0,5% weaker at R27,03 and Nedbank 0,9% lower at R179,97.

While banks will suffer from interest margin compression in the short term, Faizal Moola, an analyst at Avior Research, said they should benefit from improved conditions in the long term.

Bad debt levels will start to improve, he said, adding that the banks should also start to see transaction volumes improve as the economy does.

"Overall, there'll be an improvement in the long term," said the analyst.

derbyr@bdfm.co.za