South African banks opening the taps – but not for everyone

South Africa’s major banks are beginning to extend more credit to households and companies, as interest rate cuts have made debt more affordable. 

However, while credit extension continues to grow, this has largely been driven by increased lending to corporates. 

Household credit growth remains subdued, with growth flatlining over the past three months. In particular, credit card growth has slowed, home loans remain stagnant, and personal loans have actually declined year-on-year. 

This indicates that private sector credit extension has lost some momentum in recent months, potentially pointing to increased financial pressure on households. 

In his most recent Weekly Focus podcast, Stanlib chief economist Kevin Lings unpacked the 5.9% year-on-year growth in private sector credit in August. 

This growth rate was up slightly from 5.8% in July, driven by a significant 8.3% increase in corporate credit extension. 

Banks have been more willing to extend credit to companies rather than households, as they remain in generally better financial health. 

Corporates are also increasingly benefiting from major economic trends, such as the immense investment in renewable energy, backup water supply, and infrastructure maintenance – all of which need to be financed. 

In contrast, households remain under financial pressure, with Lings pointing out that much of the growth in consumer spending has come from temporary relief and early withdrawals from retirement savings under the new two-pot system. 

This growth is extremely narrow and unsustainable, with the withdrawals likely to decline and reach a steady state, and cyclical factors, such as declining inflation, set to reverse. 

The effects of interest rate cuts over the past two years have also largely worked their way through the economy, translating into faster credit extension growth. 

However, the absence of continued interest rate cuts as the Reserve Bank moves towards a lower inflation target will constrain household credit growth further. 

The financial pressure households are under also translates into declining affordability for new credit products and increased limits. 

As a result, corporate credit extension grew strong year-on-year in August, while household credit growth remains flat at 3% – unchanged from both June and July. 

A breakdown of household credit reveals that personal loans declined by 0.2% year-on-year, while residential mortgages expanded by only 2.3%. 

The only area of household credit that is growing a little faster is credit card debt, which was up 7% year-on-year, but it has lost some momentum in recent months.

This can be seen in the graphs below, courtesy of Lings and Stanlib. 

Different playbooks for different banks

South African banks are now broadly in an expansionary phase, with lending expected to continue to pick up, albeit at slower rates. 

Lending growth will remain cautious, with banks preferring to lend to specific sectors and infrastructure investment being particularly attractive. 

Lending to his area has been driven largely by investments in renewable energy projects and will be fuelled by private investment in South Africa’s transmission grid and logistics infrastructure. 

This is feedback from S&P Global Ratings, which outlined its views on the South African banking system as part of its various ratings actions on local financial institutions.

However, individual banks appear to be taking different strategies based on their areas of strength and respective balance sheets.

FNB CEO Harry Kellan explained that the bank is stepping up lending more aggressively in South Africa, betting on its healthier balance sheet and improved consumer financial health. 

“We are expecting better growth rates of advances in the next 12 months because impairments have stabilised,” Kellan told Bloomberg.

“While the strain in consumers continues, the affordability for some individuals has improved, which means that our lending capacity has increased.”

FNB was relatively cautious in 2020 and the years that followed, while interest rates were at multi-year lows to contain its credit loss ratio and ensure the bank was in a position to pick up lending in future. 

The strategy kept the lender’s credit loss ratio — bad loans as a share of total lending — below the top of its 80-to-110 basis-point target, while rivals Absa and Nedbank breached their ceilings in 2023. Absa only pulled its ratio back within target by June this year.

Capitec is also relatively more aggressive in its lending to clients, growing its personal banking and business banking loan book strongly over the past financial year. 

Standard Bank has increased its lending, but this is largely driven by the bank’s substantial corporate and investment banking division. 

This division has been the largest funder of renewable energy projects and infrastructure in South Africa and the wider continent, focusing its strategy on long-term trends. 

The difference in lending approaches between Capitec and Standard Bank can be seen in the graph below, with Capitec preferring personal lending and Standard Bank looking elsewhere.