The Prudential Authority (PA) has called on SA’s big banks with operations in the rest of Africa to exercise caution when extending credit in countries where the risks of sovereign default and related sovereign credit rating downgrades are pronounced.
The regulator cited the example of Ghana’s sovereign default. Ghana defaulted on most of its overseas debt at the end of 2022.
Standard Bank, Africa’s largest lender by assets, has exposure to the West African country. The “Big Blue” last year made a $81m provision last year to cover potential losses arising from Ghana’s loan-restructuring programme. Nedbank has an indirect exposure to Ghana through its holding in Ecobank.
Absa in March reported that hyperinflation in Ghana had cut its after tax profit by R400m.
“SA’s sovereign fiscal position has deteriorated over the past few years, which resulted in multiple credit rating downgrades by the ratings agencies, with the country reaching its lowest credit rating levels from the three large ratings agencies since 1994. Thus, the interconnectedness between the financial sector and the sovereign has continued as a credible concern,” the PA said in its annual report.
“Similarly, debt sustainability risks across the Africa region pose an ongoing issue for sovereigns. High sovereign debt levels, along with reduced debt and interest servicing capacity, increase the possibility of sovereign restructures or downgrades and defaults,”
“Contagion risks across regions in Africa are being monitored by regulated financial institutions. The PA continues to apply moral suasion on banks to limit their risk appetite and tighten the lending criteria on high-risk regions until the risk of sovereign debt ameliorates.”
Ghana followed Ethiopia, Chad and Zambia in having to restructure its debt after defaulting on the interest on its debt.
The rest of Africa has become particularly important to Standard Bank, with CEO Sim Tshabalala having given the group’s head of corporate and investment banking Kenny Fihla increased responsibilities at a group level, so he can focus more on the rest of Africa portfolio.
Standard Bank’s latest set of results show that its banking operations in 19 other African countries earned the group more than its SA operations, contributing more than 40% of its headline earnings.
In 2012, the gross loans from the rest of Africa represented 13% of Standard Bank’s loan book, and today that has grown to about 20%. The Africa Regions’ deposit liabilities in 2012 contributed only 15% to Standard Bank, but that has now grown to about 22%.
The SA banking sector saw impaired advances increase to R295bn as at December 2023
— Prudential Authority's report
Over the years, the group also increased the capital it deploys to Africa Regions. It consumed only 15% of total capital deployed by the group in 2012, but this has grown to more than 25%.
The PA said gross credit extended by the banking sector grew by 4.7% year on year, reaching R8.5-trillion in December 2023.
The regulator noted that inflation and interest rates have had an adverse effect on household disposable income and small businesses, and weighed on asset quality indicators in 2023 on the back of subdued loan growth.
“The SA banking sector saw impaired advances increase to R295bn as at December 2023 (December 2022: R242bn), representing year-on-year growth of 21.6%. Though impaired advances have somewhat flattened over the past five months, they remain elevated and are growing at a higher rate relative to credit extension,” the watchdog said.
“The PA will continue to monitor banks’ credit risk management practices and encourage banks to ensure prudent financial and risk management practices to weather the storm amid tough operating conditions. Domestic credit growth is expected to remain subdued in 2024.”
Standard Bank and Nedbank have said they expect two interest rates cuts before the end of this year.
Sanlam Private Wealth said that based on its projections SA’s most valuable banking group, FirstRand, is likely to sustain returns in the vicinity of 20% in the coming years.
The entity said that unlike its competitors FirstRand had limited earnings sensitivity to interest rate cuts, resulting in a more stable net interest margin.
Sanlam Private Wealth estimates that all things being equal a one percentage point cut in interest rates could see FirstRand’s headline earnings fall only 2%, compared with 7% for Nedbank and 4.5% for Standard Bank.
Correction: July 11 2024
A previous version of this story incorrectly reported that China defaulted on its debt. Ghana is the sovereign that defaulted on its debt. Business Day regrets the error.
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