South African Banks See Increase in Revenues as Economic Conditions Improve

South African banks have experienced significant revenue growth this year, bolstered by an improving macroeconomic environment and a stabilizing political landscape that enhances the outlook for the country’s banking leaders.

In the first half of 2024, Standard Bank reported headline earnings of 22 billion rand ($1.22 billion), marking a 4% increase compared to the same period last year, alongside a return on equity of 18.5%. Additionally, Old Mutual’s pretax profit surged by over 10% to 9.22 billion rand ($510 million), while Capitec saw its headline earnings grow by 36% to 6.4 billion rand ($354 million).

FirstRand, Absa, and Nedbank also reported similarly robust revenue growth. Collectively, the major banks in South Africa achieved a total headline earnings growth of 2.5% in the first half of 2024 compared to the same period in 2023, despite a complicated macroeconomic backdrop characterized by a contentious election campaign and significant political volatility.

What accounts for this remarkable performance across the board? Part of the explanation lies in the higher interest rates in South Africa and globally. With interest rates starting the year at 8.25% and currently at 7.75%—in contrast to pandemic levels of around 3.5%—this has positively impacted the net interest income that South African banks earn from their outstanding loans.

South African firms expand across the continent

Another aspect of the growth can be attributed to the increasing investment by major South African financial institutions in various African markets.

Moreover, international banks headquartered in the UK or Europe, including HSBC, Standard Chartered, and BNP Paribas are progressively divesting from Africa to concentrate on their core operations and markets. This shift has created opportunities for Africa’s leading financial institutions, many of which are South African, to fill the void left by their exit.

Yet, pan-African expansion carries its own set of risks. While numerous African markets are experiencing substantial revenue growth in local currency terms, the ongoing strength of the US dollar and the significant depreciation of African currencies present challenges for international banks operating in these regions.

Nevertheless, the potential rewards are considerable. For instance, 41% of Standard Bank’s headline earnings now originate from its franchises in the “Africa regions,” with particularly strong growth in countries such as Angola, Ghana, Kenya, Mozambique, and Nigeria. Thanks to their pan-African expansion, Standard Bank’s active client base increased by 5% in the first half of the year.

Other South African banks are following suit by aiming to broaden their footprint across Africa. Nedbank is working to lessen its reliance on South Africa by venturing into new African markets, recently setting a goal to increase the profit share from other African countries from the current 9.2% to nearly 40% within the next decade.

Making strides in fintech

Another factor behind their strong performance is the rapid adoption of digitalization by South African banks. A recent report from PwC highlighted that “the migration of customers to digital banking platforms and channels […] has moved from theme to certainty.”

The report noted, “South Africa’s major banks have consistently increased their number of digitally active clients every reporting period since the second half of 2019 to approximately 20 million.” This pivot towards digital banking has allowed South African banks not only to grow their client base but also to enhance and tailor the customer experience, all while achieving cost-saving measures that boost profitability.

These trends in digitalization have also fueled the expansion of South Africa’s fintech industry, emerging as an important player in the country’s financial landscape. By 2023, South Africa was home to 140 fintech start-ups, accounting for about 20% of the total on the African continent. Many traditional financial institutions in South Africa have recognized the growth potential of these new fintech ventures and have supported their development.

For instance, in March this year, Standard Bank announced a 200 million rand ($11 million) “growth facility” for the Johannesburg-based fintech Float, which provides “buy now, pay later” services, allowing consumers to use credit cards and spread payments over 24 interest-free and fee-free monthly installments. This funding will enable Float to roll out its platform widely and accelerate its growth plans over the next four years.

Standard Bank expressed that “Float aligns with Standard Bank’s strategy of driving sustainable growth and supporting fintech businesses that foster financial inclusion and digital transformation across Africa […] assisting innovative, high-growth businesses is a key aspect of achieving sustainable growth across the African technology, media, and telecom landscape.”

The potential of South Africa’s fintech sector is vividly illustrated by significant investments secured this year. In December, the South African digital bank Tyme Group became Africa’s latest unicorn by raising $250 million from Brazilian firm Nubank in a Series D funding round that valued the company at $1.5 billion.

TymeBank, which caters to lower-income and financially underserved individuals, already has 10 million users in South Africa. This strategy has yielded robust growth prior to Nubank’s investment, with its net operating income tripling year-on-year in 2024, even as operational costs rose by 10%.

Further growth is on the horizon for TymeBank and other South African fintechs, with projections indicating that the number of South Africans utilizing neobanks will reach 19.5 million by 2027, driven by increasing demand for mobile banking and a focus on servicing underserved communities through digital solutions.

Coalition government stability

The outlook remains optimistic for South Africa and its banking sector. The establishment of a stable coalition government following a historic election in May has reassured investors and businesses, particularly as the government launches an ambitious reform agenda in crucial areas such as energy and logistics.

While ongoing issues, particularly in the ports and railway networks, have impeded growth, the new coalition government has prioritized these challenges as critical to address. South Africa’s government of national unity (GNU) has also pledged to enhance job creation, reduce public debt, and invest in infrastructure.

The Bureau for Economic Research forecasts that these reforms will lead to a stronger growth rate of 2.2% by 2025. With inflation declining, the South African rand stabilizing and appreciating against the US dollar, and a projected decrease in interest rates, the growth prospects for South Africa appear promising. Similar trends are expected in the key markets where South African banks operate.

Recently, global credit ratings agency S&P upgraded the outlook for South African debt from “stable” to “positive,” stating that the upgrade “reflects our view that increased political stability following the May general elections and a push for reforms could enhance private investment and GDP growth.” While South Africa’s rating remains at BB-, below investment grade, a potential credit rating upgrade would lower borrowing costs for the government when seeking to fund its infrastructure initiatives.

South Africa’s banks have demonstrated their resilience amid challenging macroeconomic conditions, with aggressive expansion and digitalization efforts driving increased revenues and profitability. As economic pressures ease and higher growth levels are anticipated, South African banks are well-positioned to maintain this positive trajectory.