How South African banks are navigating consumer confidence challenges and credit demand

Although the economic environment improved in 2024, South Africa’s big banks didn’t reap the full benefits and saw margins squeezed – with potential storms ahead due to geopolitical issues.

Despite ongoing global and local uncertainty, South Africa’s largest banks – Absa, Nedbank, Standard Bank, and FirstRand Group –remain well positioned to handle storms, even as they face persistent economic headwinds, including net interest margin compression, subdued loan growth, and recent escalations in global geopolitical risks.

This is according to a BDO South Africa report, which covered the last financial year. 

Kevin Hoff, head of banking at BDO South Africa, is optimistic about the year ahead. He said there are positive signs for continued economic activity, consumer disposable income and spending as GDP is forecast to increase around 1.5% over the next two years. 

“Interest rates are expected to further decline in late 2025 and a lower inflation base is expected to continue with forecasted inflation set to sit around the mid target range that the SARB has set of 3% to 6%. Against this backdrop, we are expecting consumer lending to pick up,” Hoff said. 

Yet, as Annabel Bishop, Investec chief economist, has said, consumer sentiment collapsed in the first quarter, decreasing to the low last seen in the first half of 2023. She noted that the FNB/BER consumer confidence reading dropped to minus 20 in the first quarter of the year from negative 6 in the prior quarter, which she said was well below the long-term average as financial pressures weigh on consumers.

Bishop said that the possibility of a 2% VAT hike, higher excise duties and only partial relief for inflation creep on incomes and none on medical aid tax credits all dulled consumer sentiment in the quarter, during which National Treasury presented the first iteration of the National Budget. 

With the increase in VAT now expected to be lower, Bishop said “confidence is likely to become markedly less depressed” in the second quarter. 

Although banks benefitted from an improved economic environment last year, there was an overall slowdown in consumer credit demand, BDO South Africa’s “Weathering Change and Seizing Opportunity” report found. Hoff said that, even though consumers had the benefit of lower interest rates and inflation, the advantages of those only came much later in the period”. 

Moreover, Hoff said interest rates remain relatively high when compared to what they were pre the COVID-19 pandemic. “This has been further dropped household disposable income, which has increased the demand for credit, but not necessarily the lending appetite for the four banks, with many of the consumers not necessarily meeting their credit scoring criteria.”

During the year, banks also experienced margin squeeze as the South African Reserve Bank maintained a cautious approach to cutting interest rates, implementing small cuts from last September. As a result of a higher inflationary environment, BDO South Africa said that “banks faced pressure to offer competitive deposit rates to retain clients”. 

However, the four banks included in the survey were successful in managing impairments during 2024, apart from loans that are unlikely to be repaid, said BDO South Africa.

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