South African banks are reducing their lending to the private sector as they have become more cautious in extending credit due to the country’s stagnant economy and households coming under increased pressure.
This is feedback from S&P Ratings, which outlined the various risks facing South Africa’s banking sector in its South African Banking Outlook 2024.
The major risk to South African banks is the country’s weak economic growth, mainly because of an inconsistent electricity supply and severe logistical challenges.
S&P said if these structural issues are not addressed adequately, they will create long-term setbacks for the South African economy.
The rating agency projects economic growth of 1.5% for South Africa in 2024.
Higher interest rates and inflation will also hurt local banks through an increase in bad debt and an inability of South Africans to pay back their loans.
S&P expects the banking sector’s credit loss ratio will remain slightly higher than the historical low of 0.75%, averaging 1.4% of total loans through 2024.
Similarly, non-performing loans will likely remain above 4% of systemwide loans in 2024.
These factors will combine to simultaneously subdue the private sector’s appetite for more credit and reduce local banks’ willingness to extend credit.
Domestic credit growth will remain lower in 2024, at around 5%, after lending plunged in 2023 following a rebound in 2022 as banks became more cautious about extending credit as interest rates rose.
S&P said banks are likely to extend further credit to specific sectors, such as renewable energy companies and enterprises that import renewable energy equipment, as the country continues to face an energy crisis.
Chairman of the Banking Association of South Africa (BASA) and Standard Bank South Africa CEO Lungisa Fuzile said that banks face strong headwinds in the country.
In BASA’s latest annual report, Fuzile said that, besides volatility in the global economy and financial system, South African banks have to contend with a stagnant domestic economy.
As a result, they have had to increase their provisions for bad debt as households and companies struggle to repay loans.
Of great concern to Fuzile are the extended periods of severe load-shedding the country is being subjected to, adding further pressure to businesses and households.
The need to procure alternative energy sources has led to some businesses closing, resulting in job losses and the destruction of livelihoods.
Furthermore, the deterioration of vital infrastructure through corruption, theft, and vandalism has resulted in massive economic losses and a sharp reduction in tax revenue.
At the root of all this is the country’s collapsing state-owned enterprises, which are increasingly passing on their debt to the national government.
The Reserve Bank said this has resulted in the domestic financial sector being highly exposed to government debt.