South African banks to take R50 billion hit 

South African banks are expected to take a R50 billion hit from bad debt, as individuals are not able to pay off their debt due to elevated interest rates. 

Despite this hit, rating agency S&P Global expects local banks to maintain producing very strong returns of above 15%. 

S&P Global recently published its latest report on emerging markets for the fourth quarter of 2024. 

Focussing on credit extension, the agency said the lacklustre growth of the economy will constrain South African banks. 

In the latest results of some of the country’s largest banks, credit impairments remained towards the upper end of their through-the-cycle target ranges.

Coupled with tight lending conditions, credit growth remains subdued at 5% in 2024, S&P said. 

While leverage remains stable, with private-sector credit to GDP hovering around 70%, high interest rates and elevated food prices will continue straining households’ disposable income. 

“We, therefore, expect that the banking sector’s credit loss ratio will average 1% of total loans through 2024, higher than the historical low of 0.75%. 

South Africa’s banks have around R5.3 trillion in total loans, which would translate into a R50 billion hit for them.

Similarly, non-performing loans will likely remain elevated, above 4% of systemwide loans in 2024. 

This is significant, but S&P emphasised that local banks remain very well-capitalised and are able to withstand severe external shocks. 

Nevertheless, we anticipate that the sector will maintain strong risk-adjusted returns of 15%-16%, on average, in 2024, supported by net interest margins and transactional revenue. 

This, in turn, will support banks’ internal capital generation. South African banks will maintain robust capital buffers against the minimum requirements. 

Importantly, South African banks are less exposed to external refinancing risks than some other emerging markets as most debt is held in rands.  

Also, S&P noted that South Africa has deep liquid capital markets, which could prove helpful when banks start to issue additional loss-absorbing debt. 

The expected credit loss ratio of 1% for the industry is similar to expectations at the beginning of the year, where S&P expected significant credit growth to come from lending to companies to mitigate against load-shedding. 

However, credit extension to individuals and other areas of the economy is expected to pick up as the Reserve Bank as entered its cutting cycle with a 25 basis points cut earlier this month. 

Capitec and Standard Bank, two of South Africa’s largest banks, have said they are beginning to open their lending taps as they think the growth in non-performing loans has peaked. 

Standard Bank noted that early delinquencies on debt have begun to decline and the growth in non-performing loans has slowed. As a result, it expects lending to pick up in the second half of the year. 

In an interview with Daily Investor, Standard Bank CEO Sim Tshabalala said the bank had never shut its taps, explaining that it had applied the same criteria to all clients across the past two years. 

What has happened is that consumers have come under increasing financial pressure and can no longer meet affordability criteria. 

“Furthermore, other players have come back to the market and they have been undercutting in price. Our approach to this is that after the point where this becomes uneconomic for us, we do not extend credit.”

“The summary of my point to you is that we never shut the taps. We were simply applying age-old principles of banking, and we stood by our clients now when you turn them to the health of the consumer.” 

“So, in other words, we’ve seen the worst of it as interest rates decline as inflation declines and consumer confidence improves. We should see a growth in the loan book.”

“The taps are open, and we are just waiting for more demand from individuals.”

In Capitec’s 2024 results presentation, CEO Gerrie Fourie said the bank would remain cautious regarding its lending criteria.

“If you look at the economy, we all know it’s on thin ice,” he said. “In August I said Ukraine/Russia looks like it stabilised, and nothing else must happen in the world.” 

“Then Israel happened, and now two to three weeks ago, Israel/Iran took place, and all of that has an impact on South Africa.” 

“So, our focus on the credit side is going to be on business banking on the secured side, but we will be very cautious in the retail space.”

Fourie told Daily Investor that Capitec would only consider relaxing its lending criteria if South Africa achieves high economic growth and interest rates are down. “Then we can open up,” he said.

At the Media Day on 22 August 2024, Fourie said that the time had come, and the bank had opened its taps.