Banks are lowering their costs due to constrained consumer appetite for more credit

South Africa’s big banks adopted rigorous measures to contain costs last year after net interest margins (NIM) narrowed, in spite of improving business and consumer confidence, according to a report released by professional services firm BDO South Africa on Tuesday.

All economic and bank indicators showed the environment was improving, but the big banks did not necessarily benefit.

While the traditional bank metrics such as headline earning growth and credit loss ratio were all positive, if one digs deeper, the positive growth was not of the scale that was experienced in 2022 and 2023, Kevin Hoff, Partner & Head of BDO Financial Services South Africa, said in an online presentation.

The average NIM declined by 6.25 basis points in 2024, in stark contrast to the 28 basis point increase the previous year.

The average return on equities at Absa, FirstRand, Standard Bank, and Nedbank increased by 1.7% in 2024, while the year before it was 4%. The relatively slower performance was due to the squeeze in NIM, he said. Gross loans and advances growth slowed to 5.48%, down from 6.38% in the previous period.

The compression of NIM was primarily due to the lagged impact of previous monetary policy tightening and evolving asset portfolio compositions. The stable cost-to-income ratios at 52.13% reported over the year were evidence of these cost containment measures and operational efficiencies by the banks to counteract the endowment benefit decline being experienced, he said.

Chan-ré Pietersen, director at BDO Financial Services South Africa, said the reduced demand for consumer credit towards the end of the year was because consumers were still feeling the negative economic impact of the Covid pandemic, and the pandemic also appeared to have instilled a greater sense of financial prudence among consumers.

Hoff said South Africa had experienced a notable uplift in business and consumer confidence in the latter half of last year, and all current economic indicators showed this remained in place at present, barring a small uptick in inflation.

However, there had been an increase in geopolitical risks since the end of 2024, the impact of which still had to play out on the economy, and the potential impact of factors such as the imposition of higher US import tariffs on that country’s trade partners, might only be determined in the next few weeks, he said.

He said overall loan growth by the banks had slowed, primarily due to continued pressure on household disposable income and the ability of individuals to meet credit scoring criteria for new loan granting. Corporate lending, especially in critical sectors like energy and infrastructure, was showing positive momentum, reflecting strategic investment priorities.

He said many of the new entrants to the bank market, and some of the major banks, were focusing on growing into the corporate banking market, traditionally the biggest contributor to bank group earnings, and which was a difficult market for new entrants to gain a foothold.

He said some of these initiatives were targeting the small and medium-sized business market, historically a market neglected by the major banks and a market where compliance and reporting may be a challenge to new client acquisition.

Hoff said the banks were demonstrating effective credit risk management, as evidenced by a deceleration in impairment growth and a general decline in credit loss ratios.

“While non-performing loans are still increasing, the rate of increase is slowing, indicating the success of stricter lending criteria and enhanced portfolio monitoring,” said Hoff. Average total impairments increased by only 2.8% in 2024, a significant deceleration from the 11.5% surge in 2023.

Investment in technological upgrades and digitisation was driving cost efficiency. This was evidenced by stable cost-to-income ratios, even when the rate of income growth slowed.

Digitisation, AI, and growth off digital platforms were key factors in the banking sector’s ability to maintain profitability in a challenging economic climate, he said.

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