Credit growth across the banking sector is tepid due to the tough economy, and unless the new Government of National Unity continues the momentum to sustain structural reforms, this anaemic growth will likely continue indefinitely, says Mergence Investment Managers senior investment analyst Radebe Sipamla.
In a note yesterday, he said that in 2023, domestic banks had to contend with higher and more frequent load shedding, which placed additional strain on the economy across both the retail and business banking segments, with corporates less impacted given their stronger balance sheets that had allowed capital spending on self-generation of electricity.
The banks, in response to the challenging environment, had in 2024 markedly reduced their appetite for extending credit, especially to their retail client bases, and they had also tightened credit-granting criteria aggressively.
If the anaemic credit growth persisted, banks would likely opt for increasing capital returns to shareholders via dividends or share buybacks rather than lending when risks were not commensurate to the potential returns, given the low business confidence and strained consumers.
The biggest pocket of growth for the sector largely remained within embedded generation, where corporates invested in capacity to generate their own electricity.
Because the government had reached a situation where debt levels had become too elevated, it would likely increasingly need to partner with players in the financial services space – such as banks, insurers and asset management firms – that had robust capital levels and high cash balances, and were seeking opportunities to invest in infrastructure-related projects in partnership with the government.
He said that should the GNU deviate from embracing public-private partnerships to address the infrastructure deficit, and instead opt for increasing the country’s debt to implement populist policies, then credit growth and the earnings growth profile of the banks would likely remain muted.
He said the banking sector was well supervised and regulated by the SARB, which would likely continue if the SARB’s mandate and independence was maintained in the GNU.
However, any attempts to impede the independence of the SARB or change its mandate would impact negatively on the sector, which would manifest in a higher risk premium applied on the country’s sovereign debt, which would ultimately result in higher costs of equity and lower valuations across the sector, said Sipamla.
“The government is more likely to prioritise widening economic inclusion, given very high inequality and unemployment in the country, rather than broadening financial inclusion.”
He said local banks had become major holders of South African sovereign debt.
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