South African banks tightening the taps 

South Africa’s big banks are closing their lending taps, with demand for credit and loans far outstripping supply as fewer South Africans get approval for such products. 

This is feedback from outgoing FirstRand CEO Alan Pullinger, who outlined the huge mismatch between the demand for credit and the supply of credit following the banking group’s results. 

FirstRand – which owns FNB, RMB, WesBank and Ashburton Investments – reported a 6% increase in the company’s normalised earnings.

Profit for the period grew by 7% to R20.55 billion, and total net asset value increased by 14% to R190 billion.

Pullinger was particularly proud of the group’s ability to increase its loans and advances by 11% in the six months compared to the prior period. 

This growth was driven by stronger lending to businesses ranging from small companies all the way to large JSE-listed corporates. 

Demand from consumers also remained elevated, but Pullinger said banks are increasingly tightening the flow of credit to consumers. 

“Demand is outstripping supply. Absolutely. You are definitely seeing it in the unsecured lending space, from personal loans to credit cards to overdrafts,” he told Business Day TV. 

This is happening across the banking industry, with FirstRand’s peers also seeing strong demand for credit cards, personal loans, and overdrafts. 

However, this increased demand is not met by more supply from banks as consumers cannot afford more debt, and banks are unwilling to take on riskier customers. 

“Demand is very high for these facilities, but approval rates are very low. Maybe around two in ten people are being approved for these products,” Pullinger said. 

He explained that people are simply failing to pass the affordability test for new credit facilities and cannot take on the burden of additional debt in the current environment. 

“There is a lot of unmet demand in that space.” 

Pullinger’s comment echoes insights from S&P Ratings, which said local banks are reducing their lending to the private sector due to the country’s stagnant economy and households coming under increased pressure. 

In its South African Banking Outlook 2024, it said the major risk to South African banks is the country’s weak economic growth. 

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. 

The decline in the supply of credit to South African consumers is shown in the graph below, courtesy of S&P Ratings.