South African banks set for R53 billion hit in 2024

South Africa’s ‘Big Four’ banks – Absa, FirstRand, Nedbank, and Standard Bank – will take a R53 billion hit from non-performing loans in 2024 as their credit loss ratios rise. 

This is feedback from PwC’s Major Banks Analysis report for the period ended 31 December 2023 after South Africa’s four largest banks had reported their financial results earlier this month.

PwC’s Major Banks Analysis presents the highlights of the combined local currency results of Absa, FirstRand, Nedbank and Standard Bank and incorporates key themes from other African banks. 

The financial services firm said the country’s major banks registered strong growth in a difficult operating environment. 

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. 

Beyond South Africa, challenging fiscal positions and sovereign risks intensified in several other African territories where the major banks operate, generating higher sovereign-related risk costs. 

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 impact could be more severe than the R53 billion outlined above, with S&P Ratings expecting it to reach as high as R74.2 billion. 

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

The agency 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.