South Africa's Big Four Banks Bracing for R53 Billion Blow from Non-performing Loans in 2024

In a stark warning that underscores the economic stresses facing the South African banking sector, the country's leading financial institutions, colloquially known as the 'Big Four' – Absa, FirstRand, Nedbank, and Standard Bank, are poised to confront a collective R53 billion shock stemming from non-performing loans in the coming year. This revelation emanates from PwC's latest Major Banks Analysis, meticulously examining the performance of these financial powerhouses as of December 31, 2023.

Remarkably, the quartet managed to drive their headline earnings northward by 13.8% in 2023, hitting R113.2 billion despite an uptrend in average credit loss ratios, which swelled to 102 basis points (bps) from the previous year's 82 bps. This surge reflects the economic pressure exerted on consumers and the negative ripple effect of persistent power shortages, colloquially known as load-shedding, on businesses and household financial stability.

Extending beyond South Africa's borders, the report touched on the precarious fiscal standing and mounting sovereign risks in various African regions where the 'Big Four' reign, contributing to increased costs associated with sovereign-related risks.

Grasping the gravity of a 1.0% credit loss ratio sector-wide implies a formidable R53 billion setback for banks heavy with a joint loan total towering at R5.3 trillion. Nevertheless, this burden is not shared equally across institutions, with Absa forecasted to weather a harsher storm, given its 1.3% credit loss ratio compared to FirstRand's more modest 0.8%. Standard Bank and Nedbank are estimated to face ratios of 1.0% and 1.1%, respectively.

However, these projections could be conservative. S&P Ratings, dissecting Absa's recent financial outcomes, projects a potentially more crippling blow to local banks, with potential losses surging to R74.2 billion in the wake of South Africa's tumultuous macroeconomic landscape.

S&P's projection aligns with a predicted continual strain on South African banks in 2024, leading to a tighter rein on credit extensions. Citing a sector-wide average credit loss ratio of 1.4% for the year ahead, the ensuing losses could profoundly jolt the banking industry's financial robustness.

Behind the escalation in non-performing loans is the stark reality of aggressively climbing interest rates, which have skyrocketed by 475 basis points since November 2021. This steep ascent burdens consumers, chiseling away at disposable income in an environment where inflation stubbornly hovers around the 5.0% mark and flirts with the ceiling of the South African Reserve Bank's target range.

The confluence of these economic headwinds signals a bleak outlook for South African households, which are likely to grapple with sustained and heightened levels of non-performing loans. With more than 4% of systemwide loans predicted to fall into this category in 2024, the vulnerability of consumers is laid bare, as are the daunting challenges that lie ahead for the 'Big Four' and the South African banking sector at large.