South African banks closing the taps – with some exceptions

South Africa’s big banks have tightened their lending criteria and have shown no sign of easing the flow of credit until interest rates are cut. However, they are still willing to lend heavily to certain sectors and richer individuals. 

Interest rates in South Africa have risen sharply in recent years, with the Reserve Bank hiking rates by 475 basis points since November 2021. 

It has also been reluctant to cut rates, keeping them at a 15-year high for nearly a year as inflation remains sticky. 

This has benefitted South Africa’s largest banks, with the ‘Big Four’ of Absa, FirstRand, Nedbank, and Standard Bank growing their headline earnings to R113.2 billion in the 2023 financial year. 

However, this effect is reversed the longer interest rates remain elevated, with an increasing number of clients unable to pay back their loans. 

To prevent this effect from having too much of an impact on their businesses, banks have responded by swiftly tightening their lending criteria and cutting back on lending. 

The Reserve Bank’s Quarterly Bulletin shows this. It shows that year-on-year growth in total loans from the banking sector decreased from 9.9% in February 2023 to 3.1% in April 2024. 

In particular, lending to households slowed significantly as banks have become less likely to approve mortgage applications and other forms of instalment financing. 

However, this does not mean that banks no longer lend to clients. Credit cards and overdrafts are seeing strong growth. 

Growth in credit card advances to households remained fairly firm at an average rate of 9.0% in 2023 and accelerated to 10.4% in March 2024 and 9.5% in April.

The Reserve Bank said this is due to households relying more on credit card debt to support spending at the start of the year. 

Households’ utilisation of overdrafts remained volatile, broadly moderating throughout 2023 and contracting by 4.6% in December 2023 before increasing slightly by 3.2% year on year in April 2024. 

This reflects South Africans’ taking on debt to supplement their income and maintain their lifestyles. 

These trends are shown in the graphs below. 

The graphs also show that banks are more interested in extending credit to corporations, which aligns with what many executives have said. 

The Reserve Bank said there was a noticeable slowdown in lending to corporates towards the end of 2023 and the beginning of this year, reflecting weak business confidence and slowing consumer demand. 

However, lending to corporates has remained more resilient than households and is set to increase as confidence grows following a positive election outcome. 

The resilience in this category likely reflected the growing demand for light commercial vehicles in line with growth in eCommerce and heavy commercial vehicles for road freight transportation due to prolonged logistical challenges experienced in rail freight. 

Companies looking to reduce their reliance on government services, particularly electricity and logistics, have driven demand for lending, and banks are willing to extend credit to these businesses. 

Standard Bank South Africa CEO Lungisa Fuzile said that while household credit growth is slowing, the bank will continue to finance renewable energy projects on various scales. 

Fuzile also said that higher-income households remain in a strong position, and the bank will continue to extend credit to these individuals. 

This is broadly in line with S&P Ratings, which said South African banks will cut back on lending throughout 2024 but are likely to increase their exposure to certain sectors. 

The rating agency said banks are likely to continue financing renewable energy projects and offering credit to businesses heavily involved in this sector.