South African banks opening the taps

South African banks are now in an expansionary phase, with lending expected to pick up due to lower interest rates and a more certain local environment. 

However, lending growth will remain cautious, with banks preferring to lend to specific sectors, with 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. 

S&P said it now views the South African banking system as being in an expansionary phase and expects lending growth to pick up. 

This is primarily due to the risk of economic imbalances receding as the agency expects real estate prices to increase moderately. 

Alongside investments in infrastructure, this has led S&P to now regard the risk for South African banks as having been reduced. 

Thus, it has revised upward its anchor for rating banks in South Africa to ‘bbb-’ from ‘bb+’. S&P made it clear that it would not rate financial institutions above the government’s credit rating. 

This is due to the potential direct and indirect impact of sovereign distress on local banks, as they are significant holders of government debt. 

S&P expects cautious credit growth and a moderate increase in real estate prices in the next couple of years, benefitting South African banks. 

South Africa’s GDP growth will likely rise by 1.5% on average over 2025-2028 after a subdued 0.6% in 2024. 

The agency expects investments in infrastructure, including logistics and renewable projects, to create lending opportunities for banks. 

It also anticipates household lending will increase at a measured pace, supported by the reduction in interest rates. 

Within this context, credit growth is expected to accelerate to 7%-8% in 2025 and real estate prices to increase by 3% in nominal terms after falling in 2024. 

At the same time, lower interest rates and inflation will support household disposable income and the ability to repay debt. 

Thus, the banking sector’s credit loss ratio will normalise, averaging 90 basis points (bps) in 2025, from about 100 bps in 2024. Similarly, nonperforming loans will improve toward 4.5% of total loans at year-end 2025 from 5.1% in 2024.

South African banks remain strong

As a result, S&P expects a strong financial performance for all major South African banks, with adequate returns on equity of 16% on average in 2025. 

This performance will be driven by the banks’ diversified business models, stable share of non-interest income, lower provisions, and higher credit growth. 

South Africa’s largest banks remain well-capitalised and should start issuing first loss after capital instruments in 2026. Top-tier banks hold an average of 400 bps in excess capital above their minimum common equity Tier 1 ratio. 

Thanks to their limited exposure to international funding, South African banks are not exposed to large-scale refinancing risk, which positively differentiates them from other emerging market banks, the agency said. 

S&P explained that South Africa’s economic risk and the specific risks to banks appear to have stabilised, supporting better financial performance. 

The stable economic risk trend reflects our expectation that improving domestic macroeconomic conditions and continued momentum in infrastructure reform will support banks’ cautious lending expansion. 

At the same time, real estate prices remain relatively stable and may begin to tick upwards in the coming years, leading to lower economic imbalances. 

The banking system’s proactive supervision and good risk-adjusted profitability underpin our view of stable industry risk. 

South African banks operate with broad and liquid capital markets that support systemwide funding, while the closed rand system mitigates banks’ exposure to external funding.

Local banks have steadily increased their credit extension to households and companies as interest rate cuts have improved customer affordability. 

Total loans extended to companies in 2024 grew by 4.8%, compared to only 3% for credit extended to households, the lowest rate since February 2021. 

This is in line with comments from some of South Africa’s largest banks, with these institutions looking to grow lending aggressively to businesses as households remain under affordability pressures. 

In its annual results for the past financial year, Standard Bank noted a reduction in non-performing loans and a slowdown in clients entering delinquency. 

This has translated into declining credit impairment charges and an improved credit-loss ratio. 

“The consumer in our retail business has started to improve, with the number entering early delinquency reducing in the last year. This is a huge, huge positive,” former Standard Bank Deputy CEO Kenny Fihla told Daily Investor after the company’s results. 

“We have also seen the distress book coming down marginally, which is also a positive for our clients and for us.”

“So, clearly, there are opportunities for us to start being slightly more aggressive from a lending point of view,” Fihla said. 

“But, we have to do that in a well-thought-through manager in those sectors that are driven and supported by growth and in areas where we think there will be high quality.”