South African banks have witnessed substantial revenue growth this year, supported by a favorable macroeconomic situation and a stabilizing political environment that enhances prospects for the country’s banking leaders.
In the first half of 2024, Standard Bank declared headline earnings of 22 billion rand ($1.22 billion), reflecting a 4% increase from the same time last year, along with a return on equity of 18.5%. Furthermore, Old Mutual’s pretax profit soared over 10% to 9.22 billion rand ($510 million), while Capitec’s headline earnings rose by 36% to 6.4 billion rand ($354 million).
FirstRand, Absa, and Nedbank also reported similarly strong revenue growth. Overall, 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 challenging macroeconomic environment marked by a contentious election cycle and considerable political instability.
What explains this impressive performance across the board? Part of the answer lies in the elevated interest rates both in South Africa and globally. With interest rates beginning this year at 8.25% and currently at 7.75%, compared to pandemic levels of around 3.5%, this shift has positively influenced the net interest income that South African banks earn from their outstanding loans.
South African firms expand across the continent
Another contributor to this growth is the increased investment by major South African financial institutions into various African markets.
Additionally, international banks based in the UK or Europe, such as HSBC, Standard Chartered, and BNP Paribas are gradually withdrawing from Africa to focus on their core operations and markets. This shift has opened doors for Africa’s leading financial institutions, many of which are South African, to seize the opportunities left by their exit.
However, pan-African expansion comes with its own risks. While many African markets are witnessing significant revenue growth in local currencies, the persistent strength of the US dollar and the considerable depreciation of African currencies pose challenges for international banks operating in these regions.
Despite these challenges, the potential rewards are substantial. For example, 41% of Standard Bank’s headline earnings now stem from its operations in the “Africa regions,” with strong growth in countries like Angola, Ghana, Kenya, Mozambique, and Nigeria. As a result of their pan-African expansion, Standard Bank’s active client base grew by 5% in the first half of the year.
Other South African banks are also aiming to expand their presence across Africa. Nedbank is looking to reduce its dependence on South Africa by entering new African markets, with a recent goal to increase the profit share from other African nations from the current 9.2% to nearly 40% within the next decade.
Making strides in fintech
Another key factor driving their strong performance is the swift adoption of digitalization by South African banks. A recent report from PwC noted that “the migration of customers to digital banking platforms and channels […] has shifted from being a theme to a certainty.”
The report indicated, “South Africa’s major banks have continually increased the number of digitally active clients every reporting period since the second half of 2019 to approximately 20 million.” This shift towards digital banking has enabled South African banks not only to expand their client base but also to enhance and customize the customer experience while implementing cost-saving measures that improve profitability.
These trends in digitalization have also spurred the growth of South Africa’s fintech industry, which has become a significant player in the nation’s financial landscape. By 2023, South Africa boasted 140 fintech start-ups, representing about 20% of the continent’s total. Many traditional financial institutions in South Africa recognize the growth potential of these fintech ventures and are investing in their development.
For example, in March this year, Standard Bank announced a 200 million rand ($11 million) “growth facility” for the Johannesburg-based fintech Float, which offers “buy now, pay later” services, enabling consumers to use credit cards and spread payments over 24 interest-free and fee-free monthly installments. This funding will allow Float to expand its platform and accelerate its growth plans in the next four years.
Standard Bank stated that “Float aligns with Standard Bank’s strategy of driving sustainable growth and supporting fintech businesses that promote financial inclusion and digital transformation across Africa […] aiding innovative, high-growth businesses is crucial for achieving sustainable growth in the African technology, media, and telecommunications sector.”
The potential of South Africa’s fintech sector is vividly demonstrated by significant investments garnered this year. In December, the South African digital bank Tyme Group became Africa’s latest unicorn by securing $250 million from Brazilian firm Nubank in a Series D funding round that valued the company at $1.5 billion.
TymeBank, which targets lower-income and financially underserved individuals, already has 10 million users in South Africa. This strategy has led to remarkable growth even before Nubank’s investment, with its net operating income tripling year-on-year in 2024, despite a 10% rise in operational costs.
Additional growth prospects loom for TymeBank and other South African fintechs, with projections suggesting that the number of South Africans using neobanks will reach 19.5 million by 2027, fueled by increasing demand for mobile banking and a commitment to serving underserved communities through digital solutions.
Coalition government stability
The outlook remains bright for South Africa and its banking sector. The formation of a stable coalition government after a historic election in May has reassured investors and businesses, especially with the government initiating an ambitious reform agenda in critical areas like energy and logistics.
While persistent issues, particularly in the ports and railway networks, have hindered growth, the new coalition government has identified these challenges as top priorities. 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 anticipates that these reforms will result in a stronger growth rate of 2.2% by 2025. With inflation decreasing, the South African rand stabilizing and appreciating against the US dollar, and expected drops in interest rates, the growth potential for South Africa looks promising. Similar trends are anticipated in the primary markets where South African banks operate.
Recently, global credit ratings agency S&P improved the outlook for South African debt from “stable” to “positive,” indicating that the upgrade “reflects our view that enhanced political stability following the May general elections and a drive for reforms could spur private investment and GDP growth.” While South Africa’s rating remains at BB-, below investment grade, a potential credit rating upgrade could lower borrowing costs for the government in funding its infrastructure projects.
Amid challenging macroeconomic conditions, South Africa’s banks have shown resilience, with aggressive expansion and digitalization efforts leading to increased revenues and profitability. As economic pressures subsist and higher growth rates are anticipated, South African banks are well-positioned to sustain this positive momentum.
