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Banking shares extended their declines yesterday after the central bank raised the repo rate by half a percentage point, the fifth increase in 10 months.

April 11, 2008

Johannesburg – Banking shares extended their declines yesterday after the central bank raised the repo rate by half a percentage point, the fifth increase in 10 months.

Absa Group, the country’s biggest provider of home loans, declined 4.2 percent; Standard Bank – the country’s biggest lender – fell 2.7 percent; FirstRand, the second-biggest bank, slumped 2.6 percent; and Nedbank retreated 3.4 percent.

Banks’ profits are vulnerable to higher borrowing costs, as increasing interest rates often result in a greater risk of defaults and slower borrowing by consumers.

Retailers’ shares also turned vulnerable and fell. Truworths International, the country’s largest clothing retailer by market value, slumped 5.5 percent, and JD Group, the largest furniture retailer, tumbled 4.4 percent.

Government bonds fell by the most in almost two years.

“The market wasn’t expecting a hike and that’s causing the short end of the curve to come off sharply,” explained Vivienne Taberer, a portfolio manager who helps oversee about $60 billion (R470 billion) at Investec Asset Management.

The rand rose against 12 of the 16 most actively traded currencies monitored by Bloomberg, gaining the most against the Norwegian krone and Swedish krona.

The local currency climbed to R7.79 per dollar at 5pm in Johannesburg, up 1.7c from the previous day.

“The rate increase today is positive for the rand,” said Ulrich Leuchtmann, an emerging market currency strategist at Commerzbank in Frankfurt.

“In an environment of falling risk aversion the risk: reward ratio of investing in high-yielding currencies becomes attractive,” he said.