Good news about South Africa’s interest rates in 2024

Standard Bank expects the Reserve Bank to cut interest rates twice before the end of 2024 due to the positivity surrounding the formation of the Government of National Unity (GNU). 

The bank revealed this outlook following a trading update for the first five months of its 2024 financial year. 

It said its headline earnings grew by low-to-mid single digits compared to the first five months of 2023 on the back of increased transaction volumes and elevated interest rates.

The bank noted lower trading volumes in the build-up to the South African election towards the end of the five-month period as investors adopted a wait-and-see approach. 

However, it expects this to reverse on the back of a positive election outcome and the formation of a broad GNU. 

The market has reacted positively to these political developments, with the rand strengthening to around R18 to the dollar, while foreign investors have pumped money into local assets. 

CFO Arno Daehnke said in a pre-close investor call that this is expected to boost the bank’s trading revenue and economic growth in South Africa. 

“We expect a continued commitment to the fiscal consolidation plan and ongoing traction with the growth-supportive reforms underway.”

These reforms and positivity from investors should also accelerate the Reserve Bank’s pivot to an interest rate cutting cycle. 

However, Daehnke said these cuts will be delayed due to the election, and while the market response has been positive, it is still volatile. 

This may push the Reserve Bank towards pushing back interest rate cuts as it would not want to introduce additional volatility into financial markets. 

“We expect some interest rate cuts across our portfolio of countries in the second half of the year. However, they are likely to be delayed in South Africa due to the election outcome,” Daehnke said.  

“Our latest house view, based on Standard Bank Research, remains 100 basis points of cumulative interest rate cuts.”

The bank expects these cuts to be widely spread out, with two cuts of 25 basis points in the second half of 2024 starting in September and two cuts of 25 basis points in the first half of 2025. 

Previously, Standard Bank expected the Reserve Bank to cut interest rates by 75 basis points in the second half of 2024 and 25 basis points in the first half of 2025. 

Interest rate cuts are expected to significantly impact the revenue and profits of South Africa’s largest commercial banks. 

Banks benefit immensely from rising interest rates, as their existing loans and advances generate more revenue without the bank having to extend more credit and take on extra liabilities. 

Thus, while the banks’ operating expenses stay relatively flat, their revenue increases, boosting their profitability. 

However, the opposite is true when interest rates are cut, with the net interest income of banks set to be slashed. 

Sanlam Private Wealth investment analyst Gary Davids estimated the impact of a 1% cut in interest rates to reduce headline earnings by around 5%, depending on the individual bank.

All things being equal, a 1% cut in interest rates could see FirstRand’s headline earnings fall by only 2%, compared to 7% for Nedbank and 4.5% for Standard Bank, Davids said. 

A 4.5% reduction in headline earnings will be around a R1.92 billion hit for Standard Bank over a full financial year.

On a brighter note for banks, a cut in interest rates will reduce the financial pressure consumers are feeling and result in less need for bad debt provisions and fewer credit impairments – supporting earnings.

This positive impact, however, will lag the immediate hit from a cut in interest rates as a reduction in pressure on consumers will take time to translate into improved loan repayments.