Absa and Standard Bank ATMs. Muted growth has been predicted for both banks until next year. Photographer: Armand Hough/Independent Newspapers.
Fitch Ratings analysts yesterday said muted credit and revenue growth was likely to persist for Standard Bank and Absa up to 2025, owing to a less rosy economic outlook for South Africa although the regional operations of these lenders are likely to provide some buffer.
They have cited stronger return on assets, higher revenue and earnings contributions from the banks’ pan-African subsidiaries.
“We expect still muted credit and revenue growth in the banks’ home markets over 2024–2025 due to subdued macroeconomic conditions,” said Fitch Ratings in a note on the South African banks yesterday.
“The African subsidiaries should continue to boost their parents’ results, helped by still high interest rates in some jurisdictions, supporting wide margins despite likely rate cuts in the second half of 2024 in many markets and solid real gross domestic product (GDP) growth.”
Fitch has forecast median real GDP growth of 4% in 2024 in sub-Saharan Africa, compared with 0.9% for South Africa.
With a volatile rand projected to persist post-elections, the performance of banks in the South African market was also predicted to be sluggish while “stabilising regional currencies should also support the subsidiaries’ contribution” to the groups’ profits.
Absa and Standard Bank have operations in regional markets such as Zambia, Mozambique, Ghana and Kenya, among others.
Standard Bank had “the highest contribution” from African subsidiaries, accounting for 42% of headline earnings, noted Fitch Ratings.
The contribution of Absa’s regional operations also increased to about 30% of the group’s normalised headline earnings compared to a contribution of 14% in 2022, “partly due to slowing revenue growth and rising impairments” in South Africa.
“Standard Bank and Absa reported the sharpest improvements in returns on assets from their regional operations supported by stronger revenue growth, a fall in loan impairment charges reflecting the banks’ cautious growth in some markets,” Fitch said.
It further predicted that the African subsidiaries of the two large pan-African banking groups based in South Africa will continue to have good profitability in 2024 and 2025, supported by still high interest rates, stabilising currencies and steady balance-sheet growth.
This was expected to offset ongoing underperformance in the groups’ domestic markets.
Rising interest rates, regional business expansion, and robust balance-sheet growth which was often outpacing growth in domestic markets had helped boost the contributions from the African subsidiaries of Absa and Standard Bank in 2023.
However, there has been elevated volatility in some key regional market currencies, especially in Egypt, Nigeria, and Ghana, among others.
Meanwhile, another ratings agency Moody’s Investor Services warned earlier this year that South African banks will struggle with rising non-performing loans as consumers suffer from narrowing savings and elevated interest rates.
However, the ratings agency maintained a stable outlook for the country’s financial services sector.
“High interest rates, subdued growth and narrowing savings buffers will weaken borrowers’ repayment capacity. Unsecured consumers loans are particularly exposed,” Moody’s had said in a Banking System Outlook report for South Africa.
Further worsening the situation was an increase in the debt-service cost to household income ratio, which rose from 7.1% in June, 2022 to 8.9% as at September, 2023.
South Africa’s overall debt to disposable income currently stands at 62%.
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