South African Banking: weathering change, seizing opportunity

Johannesburg - South Africa’s banking sector is navigating a complex landscape marked by fluctuating interest rates, subdued consumer demand, and evolving corporate financing needs. Furthermore, the sector is experiencing compression of net interest margins, primarily attributable to the lagged impact of previous monetary policy tightening and evolving asset portfolio compositions, says Kevin Hoff, BDO South Africa Head of Banking. He made these comments at the release of a report by BDO South Africa titled “South African Banking: Weathering Change, Seizing Opportunity”.

He says in response, financial institutions are prioritising rigorous cost containment measures, evidenced by the maintenance of stable cost-to-income ratios, alongside strategic enhancements to operational efficiency, to counteract the endowment benefit decline currently being experienced.

“Overall loan growth has slowed, primarily due to continued pressure on household disposable income and the ability of individuals to meet credit scoring criteria for new loan granting. Conversely, corporate lending, especially in critical sectors like energy and infrastructure, is showing positive momentum, reflecting strategic investment priorities. The banks are demonstrating effective credit risk management as evidenced by a deceleration in impairment growth and a general decline in credit loss ratios across the sector. Non-performing loans are still increasing, albeit at a slow rate, indicating the successful implementation of stricter lending criteria and enhanced portfolio monitoring,” Hoff says.

He says banks are investing in strategic technology upgrades and using digitisation to drive cost efficiency. This is evidenced by stable cost-to-income ratios, even when the rate of income growth slowed. Digitisation is a key factor in the banking sector’s ability to maintain profitability in a challenging economic climate.

Meanwhile, Chan-ré Pietersen, BDO South Africa Director:  Financial Services, says when it comes to return on equity and cost to income ratios, it has been a balancing act in a challenging economic environment. The sector achieved a moderate increase in return on equity, averaging 1.7%. However, this growth occurred against a backdrop of subdued income growth across the sector. The average cost to income ratios last year remained relatively flat at 52.13%, indicating effective cost management. Notably, Standard Bank and FirstRand achieved reductions in their cost to income ratios by 1.75% and 2.00%, respectively.

“Several factors influenced these metrics, such as low growth in advances and net interest income impact owing to subdued growth in advances.  This, combined with the net interest margin compression, has contributed to the pressure on overall income. However, while income growth was constrained, banks have demonstrated effective cost management, preventing a significant increase in the cost to income ratio. This is likely due to the banks increased investment in technological efficiency and digitisation.”

She says the sector's performance in managing credit risk reveals a nuanced picture of resilience and proactive adaptation. This positive trend can be attributed to the positive economic environment in the latter half of 2024, as well as banks' enhanced collection and loan origination strategies which yielded tangible benefits, in the process reducing the need for substantial impairment charges. In addition, the strategic release of forward-looking provisions contributed to lower income statement charges, reflecting a proactive approach to risk management. Despite the positive trends in impairment growth, the sector continues to grapple with an increase in Stage 3 non-performing loans (NPLs). These loans, representing the most significant credit deterioration, saw a 3.17% year-on-year increase, although this is a reduction from the 4.87% increase recorded in 2023.

Looking ahead, Hoff says there are signs of optimism amidst the structural hurdles in the country, as well as positive signs for continued economic activity and consumer disposable income and spending. This will be supported by continued GDP growth in excess of 1.5% for the next two years, further interest rate cuts in late 2025 and a lower inflation base, with forecasts of inflation to remain around the mid-range targeted by the South African Reserve Bank (SARB). Against this backdrop, consumer lending is expected to pick up, along with stronger business and corporate lending activity to continue.

“The banks are anticipating to realise more cost and efficiency benefits from the implementation of their digitisation strategies and the move to more integrated AI technologies. There also expectations of increased focus on customer centric models, platform banking expansion and focused product offerings as the competitive landscape continues to expand, particularly in the retail lending sector. Obviously, this is all within the current uncertain backdrop of the geopolitical risks faced, particularly the escalation and potential contagion impact of the trade wars and the tension in the Government of National Unity (GNU). We wait to see how SA responds and is impacted on by these risks, and their knock-on impact on the economy and the banking customer base,” he concludes.