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South African banks to lose billions in 2024

Banks

South Africa’s commercial banks are set to lose over R100 billion in the current financial year as they continue to raise provisions to cover non-performing loans. 

This was revealed by the Reserve Bank in its first Financial Stability Review for 2024, which outlined the risks to South Africa’s financial system. 

One of the major risks identified by the bank is the rise in defaults from South Africans on their loans, which has the potential to significantly impact the capital position of the country’s commercial banks. 

The Reserve Bank said its efforts to bring down inflation by raising interest rates 475 basis points over the past few years had put South Africans under increasing financial pressure. 

High interest rates increase the cost of servicing debt, as repayments on mortgages, car loans, and other forms of lending rise in lockstep with the repo rate. 

Commercial banks initially benefit from rising interest rates as they collect more interest from their existing set of loans, greatly increasing their profit margin. 

This is compounded by the fact that the interest rates offered on savings accounts do not rise as fast as the interest rates charged on loans. 

However, as interest rates remain elevated for longer, this effect wears off as clients begin to face pressure and cannot pay off their loans. 

The Reserve Bank’s data showed that the banking sector’s non-performing loans (NPLs)15 for the largest asset classes are at their highest levels in a decade and are still rising. 

It warned that this could manifest in rising credit losses, which could reduce bank capital and profitability. 

The highest ratio of NPLs is in unsecured retail loans, which is usually the first asset class to exhibit increasing stress. 

Although corporate loans have one of the lowest NPL ratios, the growth in NPLs for this loan category has averaged over 50% since the third quarter of 2023. 

NPLs for secured retail lending (for loans made against collateral such as houses and cars) have grown more than 30% on average since September 2023. 

The graph below shows the rise in NPLs across commercial banks’ major loan types. 

Commercial banks have been increasing their provisions to cover potential losses on bad debt to counteract this rise in non-performing loans. 

This has been a feature in the results of many of South Africa’s largest banks, which are very well-capitalised and prepared for any significant increase in defaults. 

South Africa’s ‘Big Four’ banks—Absa, FirstRand, Nedbank, and Standard Bank—are expected to take a R53 billion hit from non-performing loans in the current financial year. 

The combined headline earnings of these four banks rose 13.8% in 2023 to R113.2 billion, despite their average credit loss ratio rising to 102 bps from 82 bps in 2022. 

 In South Africa, credit impairments increased on a combined basis to the upper ends of “through-the-cycle” levels due to low growth, consumer pressure and the adverse effects of load-shedding on South African households and businesses. 

The rise in the average credit loss ratio of these ‘Big Four’ banks will significantly impact their financial performance. 

A 1.0% credit loss ratio across the banking sector would result in banks, with a total of R5.3 trillion loans, taking a R53 billion hit in 2024. 

However, this impact will vary across banks, with some experiencing a greater proportion of non-performing loans than their peers. 

Absa will be the most impacted, with a credit loss ratio of 1.3%, while FirstRand will be the least affected, with a ratio of 0.8%. This reflects the varying risk appetite of these banks. 

Standard Bank’s ratio sits at 1.0% and Nedbank’s at 1.1%. 

The Reserve Bank’s data shows that despite the increase in non-performing loans, South Africa’s banks have maintained a high coverage ratio above their average since 2008. 

This is reflective of the conservative nature of South Africa’s banking sector and the tight regulation surrounding it. 

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