SA's big banks could suffer a reduction in net interest income of up to R600m on an annualised basis owing to last week's 50 basis point cut in the repo rate which has forced them to slash their prime lending rate by the same margin, according to Cadiz Asset Management equity analyst Adrian Cloete.

But banks could still make up this loss by continuing, as they have been in recent years, to expand noninterest revenues to make up for the negative endowment effect of low interest rates, now at an almost 40-year low.

Some of the strategies they have used include repricing new loans, hedging their balance sheets and growing commission and fee income. Bank analysts said last week's rate cut made it even more imperative for banks to intensify further strategies to grow revenue streams from non-interest income.

Mr Cloete said last week that on its own, the 50 basis point rate cut would reduce Absa's net interest income by about R100m on an annualised basis, and its annual earnings by less than 1% because of its hedging strategy.

Absa's group financial director, David Hodnett, said in February a successful hedging strategy to offset the negative endowment effect of low interest rates added R2,3bn to net interest income in the year to December. The Barclays-owned group will update the market on its hedging strategy when the half-year results are released on Friday.

Mr Cloete said the net interest income for Standard Bank, FirstRand and Nedbank could drop by R350m-R500m on an annualised basis. The rate cut could reduce Nedbank's annual earnings by as much as 5% and 2,5% for FirstRand and Standard.

"There will be offsets on the margin, though. As lower interest rates usually boost consumer confidence, economic growth could marginally encourage lending and help further reductions in bad debt provisions," Mr Cloete said.

"If the rate cut improves consumer and business confidence, then the higher economic activity could boost transaction volumes and therefore increase the rate of noninterest revenue growth."

Charles Robertson, an economist at Renaissance Capital, said the effect on net interest income margins for the big banks would be small, although Absa was likely to be the least affected because of its hedging strategy.

The head of personal and business banking at Standard Bank SA, Peter Schlebusch, said it was still too early to comment on the effect of low rates on net interest income as the bank was in a closed period pending the release of its half-year results on August 16.

He, however, suggested that this probably was "the right time" for companies to expand operations or replace infrastructure.

But Nedbank chief economist Dennis Dykes warned an aggressive expansion could result in future bankruptcy and a net loss to employment.

kamhungas@bdfm.co.za