South Africa’s big banks expected to feel the pain in 2024

South Africa’s big banks are expected to lose R74 billion in 2024 from unpaid loans as South Africans feel the pressure of rising living costs and continued high interest rates. 

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

Absa’s credit impairment charges increased by 13.4% to R15.5 billion in the financial year ending December 31, 2023.

The everyday banking segment contributed to almost half of these impairments. Absa also noted that the credit loss ratio increased from 96bps to 118bps, beyond the group’s through-the-cycle target range of 75 to 100bps.

S&P 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. 

Other banks found themselves in the same position.

Standard Bank noted that in South Africa, credit impairment charges increased across all portfolios, compounded by the non-recurrence of credit recoveries on the payment holiday portfolio in 2022 (R500 million).

As a result, credit impairment charges increased by 22% to R16.3 billion.

“Our clients are likely to remain constrained until interest rates start to decline. Credit impairment charges are expected to peak in the first six months of 2024, driven primarily by ongoing strain in Personal & Private Banking,” said Standard Bank CEO Sim Tshabalala.

Nedbank’s credit loss ratio improved from 121 bps in the first six months of the year to 109 bps by the end, but it was still higher than the 89bps seen in FY22.

Furthermore, amid the challenging macroeconomic environment, FNB’s impairment charges increased by 31% as customers struggled with high inflation and increased interest rates.

The credit loss ratio thus increased from 128 bps in H1 2023 to 155 bps in H1 2024.

The rating agency said it forecasts that credit losses in the sector will remain above the historical low of 0.75%, with an average of 1.4% in 2024.

“This is due to the challenging macroeconomic environment, characterised by high interest rates and food prices,” it added.

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 – much like the banks – 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. 

According to S&P, the non-performing loans are expected to remain high, exceeding 4% of systemwide loans by 2024 due to the challenging macroeconomic conditions.

South African consumers are particularly vulnerable to these difficult and prolonged conditions, which will continue to limit households’ affordability and ability to repay loans in 2024, warned S&P.

At the beginning of 2024, S&P said local banks were reducing the extension of credit to South Africans to try to limit their non-performing loans. 

Despite the rebound in lending in 2022, local banks are expected to become more cautious about extending credit, resulting in a subdued private sector appetite for more credit and a reduction in domestic credit growth.

The rating agency added credit growth will remain low at around 5% in 2024.

However, due to the country’s ongoing energy crisis, banks may extend further credit to specific sectors, such as renewable energy companies and enterprises that import renewable energy equipment.

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