Outlook brightens for South Africa's banks as rate rises lift revenues

South Africa's banks are set for a revenue boost as an economic recovery allows the central bank to reverse pandemic-induced interest rate cuts.

Nedbank Group Ltd., for instance, last year forecast a 1.5 billion rand increase in net interest income from a 100-basis-point hike in rates, with other banks also anticipating gains. Lenders benefit from higher interest rates because they can quickly raise costs for borrowers while being slower to boost rates for savers.

The central bank has lifted the repo rate to 4% by way of 25-basis-point increases in November 2021 and January, partly undoing reductions made in 2020 to help the economy weather COVID-19. Policymakers, who next meet March 25, could implement a total of four 25-basis-point hikes this year, with further 50-basis-point increases to come in both 2023 and 2024, according to a Dec. 6 trading update from Nedbank.

"Interest rate rises are net positive for banks and will alleviate some of the margin pressure caused by the steep rate cuts early in the pandemic," said Daniel Masvosvere, a senior equity analyst at Ashburton Investments in Cape Town.

The central bank did not respond to a request for comment on interest rate plans.

Consumers are well placed to cope with higher rates. TransUnion's South Africa Consumer Credit Index was 61 in the third quarter of 2021, its joint-highest level in the past decade and up from 45 a year earlier.

Revenue gains

Nedbank is set to benefit because of its large exposure to commercial property finance, said Nolwandle Mthombeni, a senior banking analyst at Intellidex in Cape Town. Standard Bank Group Ltd. should also benefit because it grew its mortgage lending "quite aggressively" in the last year or so, and these loans will reprice upward as more rate hikes occur, Mthombeni said.

Absa Group Ltd. has only forecast a 700 million rand boost from a 100-basis-point rate increase — less than half the increase Nedbank expects, even with higher net interest income, or NII. Absa's NII totaled 25.6 billion rand in the first half of 2021, and 48.9 billion rand for the full year 2020, compared with Nedbank's 15.8 billion rand and 30.1 billion rand, according to S&P Global Market Intelligence data.

The muted prediction likely reflects Absa's use of hedging, said Mthombeni.

Absa is "less sensitive" to interest rate changes, Mthombeni said. "That may play into what we see in this coming period."

Absa, along with the other large South African banks, will report earnings in March.

Nedbank, Standard Bank and Absa declined to comment to Market Intelligence for this article. FirstRand did not respond to a request for comment.

Loan growth

Rising rates will also feed through to loan growth of between 4% and 6% in 2022, rating agency Moody's wrote in a Feb. 2 report. Still, asset risk remains high due to high unemployment and inflation, and "subdued" corporate earnings, it said.

Corporate credit growth is beginning to match strong retail credit growth as South Africa's economy recovers from the pandemic, Mthombeni said. The central bank predicts domestic GDP will expand by 1.7% this year and 1.8% in 2023.

Absa's loan book grew by a mid-single-digit percentage in the first 10 months of 2021, the bank said.

FirstRand has lost market share because it has been perhaps too conservative with its lending, although it is now growing its loan book again, Masvosvere said.

Absa has outperformed its peers in terms of improving pre-provisioning profits, which have now rebounded to 2019, pre-pandemic levels, Mthombeni said. By the end of 2022, all the big banks are likely to have reached this milestone, he said.

The banking sector's 2022 profits will be bolstered by new business generation and renewed cost-cutting efforts, as well as stronger margins fueled by higher rates, according to the Moody's report. Digitalization is helping too, by optimizing operations and broadening banks' product range.

Asset quality

Any rise in problem loans will also be manageable because household disposable incomes are recovering, Moody's said. Problems loans fell to 5.86% of gross customer loans at the midpoint of last year, compared to 6.12% at the end of 2020, according to Market Intelligence data.

"[Banks'] credit loss ratios have normalized quite rapidly from the pandemic peak," Masvosvere said.

As of Feb. 23, US$1 was equivalent to 15.09 South African rand.