South African banks set to lose big in 2024

South Africa’s big banks are expected to lose R74 billion in 2024 from unpaid loans as South Africans feel the pressure of rising living costs and continued high interest rates. 

This is feedback from S&P Ratings, which used Absa’s recent financial results as an example of how local banks are being affected by South Africa’s challenging macroeconomic conditions. 

Absa released its results for the year ended 31 December 2023 earlier this month, which revealed mixed results for the bank.

Total income increased by 8.1% to R104.64 billion. However, Absa’s headline earnings per share only increased by 0.6%, while basic earnings per share decreased by 1.8%.

This is likely due to Absa’s higher credit impairment charges, which increased by over 13% to R15.54 billion in the period.

S&P said Absa’s credit loss ratio of 1.3% was in line with its expectations, as it expects South African banks to feel pressure throughout 2024 and subsequently tighten the extension of credit. 

“We project sector credit losses will continue to be above the historical low of 0.75%, averaging 1.4% in 2024 because of the challenging macroeconomic environment, characterised by high interest rates and food prices,” the rating agency said. 

A 1.4% credit loss ratio across the banking sector would result in banks, with a total of R5.3 trillion loans, taking a R74.2 billion hit in 2024. 

S&P flagged elevated interest rates as the main driver behind the increase in unpaid loans to banks. 

Interest rates in South Africa have increased by 475 basis points since November 2021, substantially raising the cost of living in the country and cutting disposable income. 

“We expect inflation will average 5.0% in 2024, remaining near the top of the South African Reserve Bank’s 3%-6% target range,” S&P said. 

Non-performing loans will likely remain elevated at above 4% of systemwide loans in 2024 due to the challenging macroeconomic conditions. 

South African consumers are more vulnerable to these difficult and protracted conditions, which will continue to constrain households’ affordability and ability to repay loans in 2024, S&P said.

At the beginning of 2024, S&P said local banks were reducing the extension of credit to South Africans to try to limit their non-performing loans. 

The combination of lacklustre economic growth and rising unpaid loans will result in a subdued private sector 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.