R53 billion blow to South Africa’s big banks in 2024

South Africa’s ‘Big Four’ banks – Absa, FirstRand, Nedbank, and Standard Bank – are expected to suffer a loss of R53 billion due to non-performing loans, as their credit loss ratios are expected to rise in 2024.

This is according to the Major Banks Analysis report by PwC for the period ended on 31 December 2023, which was compiled after South Africa’s four largest banks published their full-year reported financial results last month.

The report noted that despite the difficult operating environment, the country’s major banks have registered strong growth.

The combined headline earnings of these four banks increased by 13.8% in 2023, reaching R113.2 billion compared to the previous year.

However, their average credit loss ratio increased from 82 bps in 2022 to 102 bps.

In South Africa, PwC noted that credit impairments have increased to the upper end of “through-the-cycle” levels.

This is due to low economic growth, consumer pressure, and the adverse effects of load-shedding on South African households and businesses.

As a result, the average credit loss ratio of these ‘Big Four’ banks is on the rise, which is expected to impact their financial performance in 2024.

The report highlighted that the banking sector’s credit loss ratio was 1%. This means the banks, which have R5.3 trillion in loans, could take a R53 billion hit in 2024.

However, the impact of this loss will not be the same for all banks.

Some banks will have a higher proportion of non-performing loans than others, which will affect them more severely.

For instance, Absa will be the most impacted, with a credit loss ratio of 1.3%, while FirstRand will be the least affected, with a ratio of 0.8%.

This variation in the impact of losses reflects the varying risk appetites of these banks. Standard Bank’s ratio is 1%, and Nedbank’s is 1.1%.

The hit could be even bigger

S&P Ratings forecasts that the effect of challenging macroeconomic conditions on local banks could be more significant than the previously estimated R53 billion, reaching as high as R74.2 billion.

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 31 December 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.

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 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. 

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