Business Report has the following report:

” The advent of the National Credit Act (NCA) has seen banks aggressively issue more credit, analysts say.

The law was introduced to curb reckless lending in the market and has had the opposite effect. And the legislation is expected to cost the banking industry in lost fees.

First National Bank (FNB) said that it expected to forgo R788 million in fees after the introduction of the NCA in June. These fees will include charges applied on returned cheques and overdrawn accounts.

Nothando Ndebele, head of research at Renaissance Asset Management, says the post-June period will likely be characterised by the cleaning out of bad loans.

Low interest rates have helped reduce the bad loan charges on income statements, but as consumers are saddled with more debt, provisions have risen. In the six months to June, Standard Bank saw its bad loan charge rise by 104 percent to R1.3 billion. FNB last year recorded a 6 percent annual increase in the proportion of non-performing loans to 1.8 percent out of total loans issued of R140 billion.

But despite rising interest rates, Ndebele says the credit loss ratios of banks are coming off a low base and the industry is in no danger of strain.

All major banks, except Absa, registered better efficiency. Nedbank gained the most in cost effectiveness, improving from 65 percent in June 2005 to 58 percent in September. The bank, which has lagged its peers in retail business growth, is targeting a cost-to-income ratio of 55 percent this year.

This may be unlikely, given its retail expansion, which will see the bank rake in R1 billion to add to its existing branch network. The Old Mutual majority-owned banking group has been haemorrhaging market share, losing mostly to Absa and Standard Bank. The inward focus that the bank has adopted since its liquidity crunch in 2004 has, however, started to show results, with headline earnings for the nine months to September increasing by 41 percent to R3.2 billion.

Nonetheless, the change in competition, growing consumerism and the impending introduction of the new credit law made local banks more aggressive in their lending in the second half of last year.

Coming off a historically benign interest rate and inflation environment, the banking industry grew its loan book. Reserve Bank statistics showed that in September, mortgage loans increased by 30 percent on a year-on-year basis. Credit card competition heated up, with the entry of Virgin Money adding fuel to the rush to issue new credit cards.

Absa and Standard Bank last year increased their market share in the credit card market. Standard Bank has the largest market share in credit cards, with 36 percent, while Absa holds 25 percent.

Although banks continued to build their interest income revenue base, last year saw the start of an inquiry into industry competitiveness and transaction charges. The inquiry was prompted by the research findings of Penelope Hawkins, managing director of FEASibility. It was found that banks may be using their grip on the payment system to charge high fees. Observers have viewed the probe as a threat to the banks’ non-interest income.

Absa’s efficiency ratio worsened from 57 percent in June 2005 to 58 percent last year. The bank attributed this to the Barclays integration, the expansion of its outlets and the installation of ATMs. This has helped the Barclays majority-owned bank to increase its client base to 8 million clients.

The company now boasts a 33 percent market share in home loans.

Costs related to the Barclays intergration came in at R262 million for the first six months of last year, but were partially offset by R197 million worth of synergies.

However, analysts warn that expectations for this year point to rising credit loss ratios. Absa projected that its bad loans ratio would double from the 0.36 percent it reported in June.

The outcome of the competition commission inquiry into bank charges is likely to have a far-reaching effect on the industry, particularly its ability to increase transaction fees, a source of their non-interest income. Banks will also have an opportunity to entrench their presence in the emerging and unbanked market.”