ATMs at the Waterfront, Cape Town. SA bank earnings varied greatly last year, but a slightly better economic outlook is expected to boost their local earnings this year. Photo: Michael Walker
South African banks’ profitability is expected to remain strong this year, supported by higher credit growth, non-interest income, and lower provisioning, according to credit rating agency S&P Global.
S&P’s South Africa Bank Sector Outlook for 2025 said banks will likely benefit from improved economic conditions, with prospects boosted by the improving economic reform momentum driven by the Government of National Unity (GNU), combined with continued progress to address infrastructure deficiencies.
Other reports show South African banks remained profitable last year, but they traded through difficult operating environments. For instance, a PwC South Africa report found that headline earnings of the biggest banks for the first half of 2024, only increased by 2.5%.
And on the JSE, the Banks Index has experienced significant fluctuations over the past 12 months, but has declined 17.6% over a year. Bank earnings have also varied, with, for instance, Absa in August reporting a 5% decline in interim headline earnings, while Capitec’s interim headline earnings increased by 36%. Standard Bank’s latest interim results saw headline earnings increase by 4%.
S&P said in its report, however, that for 2025, banks would also benefit from a gradual easing of credit conditions, amid moderating inflation and interest rate cuts.
Credit to the private sector in South Africa was expected to accelerate and hover around 8%-9% in 2025, mainly from investments in infrastructure, including logistics and renewable projects, the rating agency said.
“Private sector credit to GDP will slightly increase to about 80%, from an estimated 76% in 2024,” it said.
The improving macroeconomic conditions and the ability of households to access part of their retirement savings through the recent two-pot retirement system would ease pressure on the capacity of households to service debt.
Consequently, S&P predicted that the banking sector's credit loss ratio would normalise closer to historical trends, averaging 90 basis points in 2025, from an estimated 100 basis points last year.
Similarly, non-performing loans would likely improve toward 4.4% of total loans at year-end 2025 from an estimated 4.7% in 2024.
A 20 basis points net interest margin compression was expected by the end of 2025 relative to 2024 because of the anticipated interest rate cuts.
S&P predicted that the bank sector would also likely maintain a strong average return on equity of 15%-16%, despite lower interest rates, supported by higher credit growth, non-interest income, and lower provisioning.
It said planned economic reforms under the GNU, which largely focus on infrastructure deficits particularly in the railway, ports, energy, and water sectors, would create lending opportunities for banks.
For example, the private sector pipeline of 22,500 MW of energy generation projects represented nearly R400 billion of investment over the medium term. This would also be supported by the decrease in interest rates.
Banks’ asset quality metrics had come under pressure in 2024, mainly driven by their retail portfolios. This was after households’ disposable incomes and ability to repay debt were constrained by high interest rates as well as relatively high food prices.But interest rates started to deline in the second half of last year.
S&P said top-tier South African banks’ stand-alone credit profiles (SACPs) remained at 'bbb-', but the 'BB-' sovereign foreign currency rating constrained the issuer credit ratings.
“We do not rate financial institutions in South Africa above the level of the foreign currency sovereign ratings, given the direct and indirect impact that sovereign distress would have on domestic banks' operations.”
S&P said the bank’s financial performances were expected to be resilient through the cycle, and that the banks have a long track record of sound asset quality and robust regulatory capital buffers, helping them withstand economic downturns.
South African banks would also likely continue to maintain robust capital buffers against the minimum requirements. Strong profitability is expected to support stable capitalisation levels despite generous dividend payout ratios averaging 50%-60%.
“We have a positive outlook on most banks’ ratings, which reflects the outlook on South Africa,” S&P said.
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