Trouble for South Africa’s big banks
South Africa’s major banks face significant risks to their earnings, with interest rates set to fall, the economy struggling and bad debts set to rise.
According to Bloomberg Intelligence, the formation of the Government of National Unity (GNU) will likely ease the political impasse and uncertainty in South African markets, even if tough challenges remain in kick-starting the weak economy.
“Sluggish loan growth and rising impairments have led to local lenders’ earnings estimates being downgraded in recent months, marking a U-turn from net upgrades two years prior,” said Bloomberg Intelligence.
“Political developments could help both elements, yet there’s unlikely to be a quick resolution. A rebound in banks’ earnings forecasts will require both business and consumer confidence to be lifted.”
The group’s basket, comprising the six leading South African banks, shows raised or lowered earnings per share (EPS) estimates each month based on 12-month forward consensus.
In addition, interest rates are set to be cut in the near future, with 100 basis points worth of cuts expected over the next 12 months, dragging on lenders’ revenue expectations.
Lower interest rates (repo rate at 7.25% by mid-2025) will curb banks’ net interest margins and, in turn, their revenue scope.
Subdued lending expansion and rising impairments have been the key drag on estimates, with further downgrades likely.
Lending growth has weakened due to the challenging and deteriorating economic backdrop, which has impacted local banks’ prospects. Lending expansion has halved from 10%+ in early 2023 to 3%.
“The more certain political backdrop is supportive, yet the lethal cocktail of a weak housing market, low corporate confidence, and elevated unemployment have kept lending growth within a subdued 3-6% range through 2024, which looks like being sustained through 2H 2024 and into 2025,” said Bloomberg.
“That implies negative growth in real terms, given inflation of 5-6%, with per-capita growth also negative. A revival is key to boosting banking-sector revenue potential.”
A key drag for domestic lenders is the collapse of business confidence and a slowdown in South Africa’s economic growth, with Bloomberg pencilling in a standard 1% GDP growth for 20224.
Boosting the economy is essential in boosting lending, especially given the pending interest rate cuts, resulting in a margin squeeze.
Although coal-based electricity is likely to remain South Africa’s primary near-term energy source, lenders can longer-term invest in renewable energy sources by corporations and households.
However, looking more positively, banks were able to recover quickly from pandemic-induced highs on bad debt charges through new lending and regular credit checks.
“Charge-off rates above 100 bps are already back above both the 2014-19 average and banks’ normalized levels,” said Bloomberg.
“Higher interest rates, along with a fragile economy, threaten to push those higher again, though we expect charges to remain manageable. Non-performing loans have accelerated sharply over the last two years to reach a decade-high 5.9% of loans, threatening impairment uplift.”
“South Africa’s small mortgage market means higher-risk unsecured personal lending and motor-vehicle finance make up a large share of bank loan books, driving higher charge-off rates and non-performing loans.”
Markets
That said, South African lenders are in a strong position to benefit from the ANC working with the market-friendly DA and IFP, which could allow President Cyril Ramaphosa to announce a host of reforms to curb increasing state debt and end load shedding.
Share prices for banks have increased by 14% for the six leading South African banks since a day prior to the 29 May National Election, reversing initial declines when it was unclear over what route the ANC should take.
Analysts are also confident in the performance of South Africa’s banks.
Analyst recommendation shows an average compositing rate of over 4 to 5, which denotes a buy and one a sell.
Nedbank has the highest rating of 4.7, followed by 4.4 for FirstRand and 4.3 for Standard Bank.
Capitec is on the other end of the scale, with a rating of 2.6 and a negative return potential to its target price.
However, this comes after a strong share-price performance, in which its share price increased by 67% for the 12 months ended June 2024—the best in the country.
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