South African banks closed the taps – and keeping them closed

South Africa’s banks have been steadily reducing the amount of credit they give to consumers and companies over the past decades, with growth in lending dropping below 5% for the first time since the pandemic.

This was revealed in Nedbank’s Guide to the Economy for January 2024, which outlined the dire situation the South African economy is currently in. 

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. 

Higher interest rates and inflation are also beginning to hurt local banks through an increase in bad debt and an inability of South Africans to pay back their loans. 

This has resulted in South African banks tightening their lending standards to reduce the impact on their credit loss ratios and limit the need for bad debt provisions. 

In December last year, bank credit growth lost further momentum and dropped to 4.9% year-on-year versus 7.7% at the end of 2022. 

In particular, household loan growth slowed to its lowest level since March 2021 at 4.3%. 

The drag came mainly from slower growth in home loans, overdrafts, and personal loans. On the other hand, vehicle finance and credit cards are also moderated but by less than other products. 

Vehicle finance most likely saw a rise in demand due to the impact of the collapse of Transnet’s railways, creating greater demand for moving goods via road. 

Lending to companies eased to 5%, reflecting weak business confidence and a lack of investment in the local economy. 

Nedbank expects the slow down in credit growth to continue and broaden in the first half of 2024 as households will remain cautious of borrowing at high interest rates and lower confidence in the economy. 

Companies will also reduce their demand for credit as policy uncertainty surrounding South Africa’s national election will make them hesitant to commit to significant investment projects. 

S&P Ratings also expects credit growth to remain subdued in the future as the local economy is unlikely to grow at a reasonable pace any time soon. 

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.