Interest rates will remain higher for longer in South Africa as inflation remains sticky and will hover around the upper limit of the Reserve Bank’s target range.
This is feedback from Africa’s largest bank by assets, Standard Bank, following the presentation of its financial results earlier this month.
CEO Sim Tshabalala said the global economic environment continues to be marked by uncertainty and supply shocks from conflicts in Ukraine, the Middle East, and Africa.
While none of the bank’s operations are directly impacted, these global events exert pressure on economies across Africa.
South Africa, in particular, is heavily impacted as it is a relatively small economy but very open, making it vulnerable to external shocks.
And so, Standard Bank expects inflation to moderate only slightly in 2024, with it averaging 5% across the year.
This is towards the upper end of the Reserve Bank’s 3% to 6% target range, meaning that it is unlikely it will cut rates significantly.
Thus, Standard Bank only expects the Reserve Bank to cut rates by 75 basis points in 2024. These rate cuts will likely begin in the second half of 2024.
This will provide little relief for South Africans, who have seen interest rates rise by 450 basis points in the past two years.
While Standard Bank has benefitted from higher interest rates in South Africa and across the continent, higher rates for longer pose a threat to the bank in the form of non-performing loans.
It benefitted from higher rates in 2023, with net interest income growing to R97.5 billion from R77.95 billion in 2022. Its net interest margin grew slightly to 494 basis points.
However, continued higher rates will result in increased non-performing loans as clients struggle to cope with the rising cost of living and higher interest payments.
Standard Bank already flagged this in 2023 and began reducing its extension of credit across its business to prevent further increases in non-performing loans.
Its credit loss ratio rose to 98 basis points for the 2023 financial year, below its upper limit for the credit cycle.
Standard Bank has increased provisions to mitigate the effects of a potential increase in non-performing loans. This can be seen in the graph below.
Interestingly, CFO Arno Daehnke also flagged a risk to the bank from declining interest rates, which it is working hard to limit the impact of rate cuts on its performance.
Daehnke said a one percentage point cut in interest rates would result in the bank losing R1.4 billion in revenue from interest payments.
It has managed to reduce this impact from R2.2 billion at the same time last year.
