Business Day (Johannesburg)

8 July 2010

South Africa: Small Banks 'Have Edge Over Larger Rivals'

SA's smaller banks will give their bigger rivals which are battling to clean up bad loan books - a run for their money in the race to expand balance sheets weakened by the effects of the global financial crisis, according to Grindrod Bank.

Larger banks have been aggressively restructuring clients' debts in a bid to reduce impairments ahead of the next reporting season, which starts next month.

According to analysts at Investec Securities, while they expected an improved impairment picture, first- half earnings growth rates for Absa , Nedbank and Standard Bank could be lower than for the full year, mainly due to lower growth expectations.

Gauteng regional head for Grindrod, David Shimkins, yesterday said the financial crisis had been a revelation for smaller banks because, for the first time, their tiny balance sheets became a competitive advantage.

This was because they could focus on a smaller, quality loan book, rather than solely trying to grow market share.

Bigger banks had been chasing their own tails, trying to grow numbers, and had probably compromised quality. As a result, they had piled on non performing loans that they were now trying to unwind.

"Small banks can survive in the local environment," Mr Shimkins said. As the South African economy continued to recover from the recession, smaller banks would be "more nimble " in picking up new businesses, unlike some bigger competitors, he said.

Grindrod's competitors include Bidvest Bank and Sasfin, which are in merger talks with Mercantile Bank.

"I think there is greater strength at present to be a small bank because we like our independence and there is opportunity for us to compete in our market space," Mr Shimkins said.

Established in 1994, Grindrod is a boutique merchant bank and part of JSE-listed logistics and shipping group Grindrod. It had a loan book of about R1,3bn and none of its loans had been written off or was not performing because of the crisis.

Mr Shimkins said Grindrod had doubled its bottom line in the past two years but he would not discuss figures as the bank is to release its results in the next few weeks.

Its staff complement had doubled to about 70 and he predicted the complement would probably double again in the next two years.

"We do not want to chase numbers and if we can continue to increase the quality of our loan book, we would be happy. It is important, however, to increase our deposit base from the current R2bn," Mr Shimkins said.

"Our lending currently contributes about 65% to our profitability and we would want to go down to about 50%, with the rest coming from nonbalance sheet activities."

The bank was carrying out a strategic review of the banking sector to identify market segments it could exploit, such as offering services to the unbanked, Mr Shimkins said.

He warned against over-regulation, saying smaller banks would find it costly to deal with an onerous regulatory environment.

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