South African banks set to open the taps

South African banks are set to open their lending taps in the coming months as interest rates fall and domestic savings shift to the private sector. 

The country’s largest banks have adopted a cautious approach to lending in the past few years as interest rates rose to 15-year highs and consumers came under immense pressure. 

Commercial banks typically benefit from higher interest rates due to a higher interest margin on their existing loans. 

However, as rates stay higher for longer, this positive tailwind can quickly turn as consumers come under increasing pressure and cannot pay back their debt. 

This translates into higher credit losses for banks and a rise in bad debt that they have to cover by raising provisions, impacting profitability. 

To mitigate against this, some banks tightened their lending criteria, while others saw a decline in affordability for new loans as consumers failed to meet their lending standards. 

This resulted in credit extension to the private sector, particularly households and small businesses, slowing down significantly. 

The Reserve Bank flagged in its most recent Financial Stability Review that the sheer volume of government debt has crowded out lending to the private sector. 

Banks have picked up additional government debt because of limited investment opportunities amid weak economic growth and a shrinking equity market due to net JSE delistings in recent years. 

The reduced creditworthiness of borrowers has also constrained private sector credit extension by banks, incentivising banks to rather invest in government debt with high yields. 

Although this trend seems to have been arrested, banks’ holdings of government bonds remain well above pre-pandemic levels. 

Banks’ investment in government debt is further driven by the zero-risk weighting applied to bonds under the standardised approach to credit risk, which is mostly followed by non-systemic banks. 

A low- or zero-risk weighting means that banks hold little or no regulatory capital against these assets, which may have contributed to the decline in banks’ risk-weighted assets over the past few years, the Reserve Bank said. 

These factors have all come together to result in a slowing down of credit extension to the private sector, constraining economic growth. 

However, this is all set to change as the Reserve Bank has identified several factors that could see banks shift their lending focus back to the private sector. 

These factors, coupled with enhanced affordability, will likely result in banks growing their lending books in the coming year. 

The Reserve Bank said that as government borrowing is projected to remain elevated, the risk of further increases in the financial sector’s exposure to the sovereign is high. 

However, potential mitigating factors could also help shift domestic savings to the private sector rather than to the government. 

Should the recent improvement in foreign investor sentiment towards South Africa prevail, the reliance on the domestic financial system to fund the fiscal deficit may be reduced. 

Also, a reduction in credit risk as interest rates decline and the growth outlook improves may incentivize banks to extend more credit to the private sector instead of buying government bonds. 

The improvement in the growth outlook may also result in more investment opportunities for non-banks within the private sector. 

CEOs at two of South Africa’s largest lenders, Standard Bank and Capitec, have said they are beginning to grow their lending books more aggressively. 

Speaking to Daily Investor after Standard Bank’s interim results, CEO Sim Tshabalala said the bank had never shut its taps, explaining that it had applied the same criteria to all clients across the past two years. 

Tshabalala said the bank has hit the peak of bad debt in South Africa, with the consumers expected to experience relief from declining inflation and interest rates in the coming months. 

The combination of interest rate cuts and improved confidence in the local economy will drive the increase in lending from Standard Bank. 

“So, in other words, we’ve seen the worst of it as interest rates decline as inflation declines and consumer confidence improves. We should see a growth in the loan book.”

“The taps are open, and we are just waiting for more demand from individuals.” 

Capitec CEO Gerrie Fourie has also been explicit about the bank growing its lending book in the coming year as it sees new opportunities from declining inflation and interest rates. 

“We are happy with how we have handled the crisis and how agile we have been. We are fairly happy with the result,” Fourie said during the bank’s interim results presentation for the six months to the end of August. 

“We put tremendous effort into the collection side of things to ensure we could improve the collection with an entirely new system and help our clients during this time.”

Now, as inflation and interest rates come down, Capitec is relaxing its lending criteria to meet increased consumer demand for credit. 

“What we have done now actually is to open up, with loan disbursements in August being at R4.5 billion – one of our highest figures ever,” Fourie said. 

“We believe there are opportunities given what we have seen with inflation and the economy. So, we are opening up in the credit space.”