Banks set to lose big this year
JOHANNESBURG – South Africa’s (SA) 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 SA’s challenging macroeconomic conditions.
Absa released its results for the year ended December 31, 2023, earlier this month, which revealed mixed results for the bank.
Earnings
Total income increased by 8.1 per cent to R104.64 billion. However, Absa’s headline earnings per share only increased by 0.6 per cent, while basic earnings per share decreased by 1.8 per cent. This is likely due to Absa’s
higher credit impairment charges, which increased by over 13 per cent to R15.54 billion in the period.
S&P said Absa’s credit loss ratio of 1.3 per cent was in line with its expectations, as it expects SA banks to feel pressure throughout 2024 and subsequently tighten the extension of credit.
“We project sector credit losses will continue to be above the historical low of 0.75 per cent, averaging 1.4 per cent in 2024 because of the challenging macroeconomic environment, characterised by high interest rates and food prices,” the rating agency said.
A 1.4 per cent 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 flagged elevated interest rates as the main driver behind the increase in unpaid loans to banks.
Increased
Interest rates in SA have increased by 475 basis points since November 2021, substantially raising the cost of living in the country and cutting disposable income.
“We expect inflation will average 5.0 per cent in 2024, remaining near the top of the South African Reserve Bank’s 3-6 per cent target range,” S&P said.
Non-performing loans will likely remain elevated at above four per cent of systemwide loans in 2024 due to the challenging macroeconomic conditions.
South African consumers are more vulnerable to these difficult and protracted conditions, which will continue to constrain households’ affordability and ability to repay loans in 2024, S&P said.
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.
The combination of lacklustre economic growth and rising unpaid loans will result in a subdued private sector appetite for more credit and reduce local banks’ willingness to extend credit.
Domestic credit growth will remain lower in 2024, at around five per cent, after lending plunged in 2023 following a rebound in 2022 as banks became more cautious about extending credit as interest rates rose.
S&P said banks are likely to extend further credit to specific sectors, such as renewable energy companies and enterprises that import renewable energy equipment, as the country continues to face an energy crisis.