Moody’s expects a further squeeze on the net interest margin (NIM) for SA banks this year, with the ratings agency anticipating additional interest rate cuts by the SA Reserve Bank.
NIM, which compares the interest income earned by a bank to the interest paid to customers, is a key profitability metric for banks across the world.
The average NIM for SA’s major banks, based on the lenders’ latest results showed a decline of 6.25 basis points (bps), a sharp contrast to the 28bps increase observed in the previous financial year.
This is as the central bank last year cut the cost of credit as inflation fell within its target range of 3%-6%.
Moody’s said it expects SA's largest banks — Standard Bank, FirstRand, Absa and Nedbank — to face further pressure on NIMs this year, due to the gradual decline in interest rates.
“We expect the SA Reserve Bank to lower rates further, after its 75bps of cuts since September 2024, which will put further pressure on the banks’ NIMs.
“Absa, FRB [FirstRand Bank] and now SBSA [Standard Bank of SA] have structural hedge programmes in place, which will likely support NII [net interest income] and other income as the interest rate cutting cycle continues,” the ratings agency said.
“However, the structural hedges had a negative effect on banks’ 2024 results, with Absa reporting a R1.7bn charge to the income statement, while FirstRand reported a R400m cost.”
A deeper look into the four bank’s results, shows that NII — the difference between the interest income a bank earns from its lending activities and the interest it pays to depositors — rose 4% in 2024.
Moody’s said it expects asset quality metrics of SA banks to continue to improve, as borrowers’ repayment capacity is supported by interest rate cuts, lower inflation and potentially higher corporate profitability.
“Nonetheless, we believe asset risks remain elevated, especially in relation to consumer lending because of the banks’ more limited capacity to absorb additional shocks, with households’ debt-service costs to income ratio still high,” it said.
The ratings agency said while SA banks have table-funding profiles and adequate liquidity buffers, the dependence on wholesale deposits remains a structural issue the sector has to grapple with.
In banking terms, wholesale deposits means funding obtained from large institutional investors and other banks, as opposed to individual retail customers.
The funding from institutional investors is then borrowed to individual borrowers. Moody’s said wholesale funding — defined as interbank placements, bonds and wholesale deposits — constitutes between 37% and 53% of total bank funding in SA.
“These deposits are also generally more confidence-sensitive, more costly and less diversified than household deposits,” it said.
“SA banks’ funding structure is therefore more fragile, but related risks are mitigated by the closed rand system, whereby all rand transactions (physical and derivatives) have to be cleared and settled in SA through a registered bank and clearing institution domiciled in SA,” Moody’s said.
“This mitigates liquidity risks to some extent and makes the institutional funding base fairly stable.”
The banks surveyed by Moody’s reported combined headline earnings growth of 5.9% to R119bn in the 2024 financial year.
Update: April 30 2025
The story has been updated with new information.
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