S&P Global Ratings published a report forecasting the banking sector of South Africa recently, where it anticipates gross domestic product (GDP) growth to below 1.0% in 2023 and about 1.5% in 2024.
South African banks are currently facing issues related to reform progress, electricity crisis, imminent elections, external refinancing risks as well as the country’s presence in global anti-money laundering and terrorist financing watchdog’s grey list, stated the report.
S&P Global also stated persisting weak economic growth prospects, high interest rates, and inflation will likely affect households and small businesses as well as commercial real estate (CRE) performance will remain under pressure amid high-interest rates and inflation.
Domestic credit is expected to remain subdued in 2024, at about 5% in the private sector, aligning with the estimate for 2023, as banks adopt a cautious approach due to heightened interest rates and inflation, the report added.
Banks aim to extend credit to the renewable energy sector because of electricity shortages, said the research. Additionally, private sector credit to GDP will remain stable, at about 70%. Households’ disposable income will remain under pressure because of high interest rates and elevated food prices.
Credit conditions will remain stringent in 2024 limiting credit demand across all sectors, said Samira Mensah, Director & Lead Analyst at S&P Global Ratings in the report, stating reasons for weak investor sentiment, slow infrastructure improvements, and the persisting electricity crisis.
Although inflation has slowed to 5.5% since June 2023, the research expects inflation to average 5% in 2024, toward the top of the South African Reserve Bank’s (SARB) 3%-6% target range.
The report reflects credit loss ratio of the banking sector is expected to surpass the historical low of 0.75%, averaging 1.4% throughout 2024, where non-performing loans will remain at about 4% of system-wide loans through 2025.
The report said the sector will maintain strong risk-adjusted returns of 15%-16% on average, supported by net interest margins and transactional revenue, which, will support banks’ internal capital generation.
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