The prospect of radical changes in South African politics has given bank investors pause and threatens the sector's outlook at a time when credit quality is under pressure.

For the first time since the end of apartheid, the ruling African National Congress (ANC) may lose its outright majority when the country votes on May 29, forcing it into a coalition government with rival parties. One of those is the populist left-wing Economic Freedom Fighters (EFF), which wants to, apart from embarking on a process of nationalising various sectors, set up state-owned lending institutions in areas like agriculture and housing, and implement new thresholds for minimum black and female ownership in banks.

Various polls expect the ANC to drop below the 50% mark. An April survey by the Social Research Foundation (SRF), predicted that, based on two-thirds of eligible voters casting a ballot, the ANC would receive 37% of votes, followed by the official opposition, the center-right Democratic Alliance (DA), with 25%, former president Jacob Zuma's party uMkhonto weSizwe (MK) with 13% and the EFF with 11%. The ANC's support increased to about 42% in the same poll in late May.

The DA and nearly a dozen smaller, more moderate parties have entered into an agreement that aims to garner enough collective support to unseat any ANC-led coalition.

"The idea of a populist party in government would be damaging for banks and foreign investment, even if it's just in terms of investor sentiment towards the sector," Adrienne Damant, a banking analyst at Avior Capital Markets in Johannesburg, told S&P Global Market Intelligence.

Banks' positions

Four banks dominate the industry: Standard Bank Group Ltd. FirstRand Ltd., Absa Group Ltd. and Nedbank Group Ltd. The quartet's earnings have proved resilient despite the prolonged domestic economic malaise that has weakened ANC support. Among the issues facing the country are rotational power cuts, dubbed "load-shedding," high levels of unemployment and slow post-COVID-19 recovery.

Net income at Standard Bank and FirstRand has trended upward over the past two years, while that at Absa and Nedbank has remained relatively flat, Market Intelligence data shows. However, credit quality has suffered.

Last year the quartet's problem loans as a proportion of gross loans increased, with Standard Bank experiencing the biggest jump, at 105 basis points. Loss ratios are worsening due to consumers borrowing more — via credit cards and personal loans — as wage increases fail to keep pace with rising living costs, Thato Mashigo, portfolio manager at Sanlam Private Wealth in Johannesburg, told Market Intelligence.

However, the banks are doing "reasonably well" due to the higher interest rate cycle, he said.

South Africa's real GDP growth slowed to 0.6% in 2023, from 1.9% in 2022, and is expected to reach 1.0% in 2024 and 1.6% next year, according to Market Intelligence data. Unemployment is set to increase from 33.5% last year to more than 35% in 2025.

The election uncertainty is causing equity investors to pause. The banking stock index has rallied since slumping to a six-month low in mid-April but is still down about 4% in 2024.

"The EFF has spoken about nationalizing certain assets, whereas the market is hoping for further privatization or deregulation, especially of state-owned companies that have been inefficiently run and year-in year-out require additional fiscal support," Mashigo said.

The market is seeing foreign and local players sitting on the sidelines waiting for the outcome of the election, said Avior's Damant. The best plausible outcome from a banking industry perspective was that the ANC wins about 45% to 47% of the vote, which would allow it to form a coalition with moderate, smaller parties where there is continuity in policymaking. Should this happen, there could be a banking stock rally as investors return to the market, Damant said.

Absa cannot speculate on possible policy changes but it "continuously monitor[s] the operating environment to ensure that [it is] prepared to navigate any changes that may arise," the bank said in a statement to Market Intelligence. Standard Bank, Nedbank and FirstRand did not respond to requests for comment.

– Explore South African banks' positions among the biggest banks in the Middle East and Africa. – Access South African bank aggregate financial highlights on S&P Capital IQ Pro.

EFF goals

One of the EFF's goals is to fully nationalize the South African Reserve Bank (SARB), one of a handful of central banks that still has a measure of partial, private ownership. This privatization is also a policy of the ruling ANC, and has been since around 2017. The SARB has more than 800 shareholders, according to its website, and its shares are traded on an over-the-counter share transfer facility market coordinated within the bank.

SARB's independence is important in terms of controlling inflation and doing the right thing for the long-term health of the economy, regardless of whether it's an election year, according to Damant.

If it were nationalized this would "negatively impact the economy [and] foreign capital flows and would increase South Africa's country risk premium," Damant said. Observers, however, differ on how much an ownership change would impact the SARB's independence, compared to direct political interference with its mandate to defend the currency and control inflation.

Other EFF proposals include creating state-owned banks specializing in each of retail banking, agriculture, housing, and social support, according to a report by German nonprofit Konrad Adenauer Stiftung.

This model has helped some East Asian nations fund their infrastructure development and, depending on how such banks are funded, they could be positive for South Africa's economy, said Mashigo. It may have little impact on incumbent banks if the state banks are focused on sectors that are sub-optimal from a returns perspective, he said.

The EFF also wants financial services companies with financial services licenses to be at least 30%-owned by black people and 30%-owned by women, with other thresholds for management and board positions. Given criticism of the financial services industry for failing to transform sufficiently, these target figures "are arguably the bare minimum ... considering South Africa's demographics," Mashigo said.

Implementing the EFF-proposed thresholds would be manageable if phased in over about 10 years, Mashigo said.

"The EFF is raising social issues that resonate with large voting blocs and so even if it doesn't end up being part of a new government the party can still influence the policies of those in power," Mashigo said.