South African banks have seen substantial revenue growth this year, supported by an improving macroeconomic landscape and a stabilizing political environment that boosts the outlook for the country’s banking leaders.

In the first half of 2024, Standard Bank announced headline earnings of 22 billion rand ($1.22 billion), representing a 4% increase from the same period last year, along with a return on equity of 18.5%. Similarly, Old Mutual’s pretax profit soared by over 10% to 9.22 billion rand ($510 million), while Capitec’s headline earnings climbed 36% to 6.4 billion rand ($354 million).

FirstRand, Absa, and Nedbank also reported equally strong revenue growth. Together, the major banks in South Africa achieved a collective headline earnings growth of 2.5% in the first half of 2024 compared to the same timeframe in 2023, despite a complicated macroeconomic backdrop marked by a contentious election campaign and significant political volatility.

What explains this impressive performance across the board? A part of the answer lies in the higher interest rates both in South Africa and globally. With interest rates beginning the year at 8.25% and currently at 7.75%—compared to pandemic levels of around 3.5%—this has positively influenced the net interest income that South African banks receive from their outstanding loans.

South African firms expand across the continent

Another driver of growth can be attributed to the increasing investment by major South African financial institutions in various African markets.

Furthermore, international banks based in the UK and Europe, such as HSBC, Standard Chartered, and BNP Paribas, are progressively withdrawing from Africa to focus on their core operations and markets. This transition has opened avenues for Africa’s leading financial institutions, many of which are South African, to take advantage of the gaps left by their departures.

However, pan-African expansion entails its own risks. While many African markets are witnessing substantial revenue growth in local currency terms, the persistent strength of the US dollar and significant depreciation of African currencies pose challenges for international banks operating in these regions.

Nonetheless, the potential rewards are considerable. For example, 41% of Standard Bank’s headline earnings now come from its franchises in the “Africa regions,” with particularly notable growth in countries such as Angola, Ghana, Kenya, Mozambique, and Nigeria. Thanks to their expansion across Africa, Standard Bank’s active client base grew by 5% in the first half of the year.

Other South African banks are adopting similar strategies to widen their presence across Africa. Nedbank is aiming to decrease its dependence on South Africa by entering new African markets, recently setting a target to raise the profit share from other African countries from the current 9.2% to nearly 40% over the next decade.

Making strides in fintech

Another element contributing to 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 transitioned from theme to certainty.”

The report highlighted, “South Africa’s major banks have consistently 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 the customer experience and implement cost-saving measures that improve profitability.

These trends in digitalization have also fueled the growth of South Africa’s fintech sector, which has emerged as a significant player in the national financial landscape. By 2023, South Africa was home to 140 fintech start-ups, representing about 20% of the total on the African continent. Many traditional financial institutions in South Africa have recognized the growth potential of these new fintech businesses and have actively supported their development.

For instance, in March of 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, allowing consumers to use credit cards and spread payments over 24 interest-free and fee-free monthly installments. This funding will support Float in broadening its platform and accelerating its growth plans over the next four years.

Standard Bank asserted 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 […] assisting innovative, high-growth businesses is a key aspect of achieving sustainable growth across the African technology, media, and telecom landscape.”

The potential of South Africa’s fintech sector is vividly illustrated by significant investments made this year. In December, the South African digital bank Tyme Group became Africa’s latest unicorn by raising $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 serves 10 million users in South Africa. This strategy has led to robust growth prior to Nubank’s investment, with its net operating income tripling year-on-year in 2024, even as operational costs increased by 10%.

Further growth awaits TymeBank and other South African fintechs, with projections indicating that the number of South Africans utilizing neobanks will rise to 19.5 million by 2027, fueled by the growing demand for mobile banking and a focus on serving underserved communities through digital solutions.

Coalition government stability

The outlook continues to be optimistic for South Africa and its banking sector. The formation of a stable coalition government following a historic election in May has reassured investors and businesses, particularly as the government embarks on an ambitious reform agenda in vital areas such as energy and logistics.

While persistent issues, especially in the ports and railway networks, have hindered growth, the new coalition government has prioritized these challenges as critical to tackle. South Africa’s government of national unity (GNU) has also committed to enhancing job creation, reducing public debt, and investing in infrastructure.

The Bureau for Economic Research predicts that these reforms will foster a stronger growth rate of 2.2% by 2025. With inflation decreasing, the South African rand stabilizing and appreciating against the US dollar, and a projected reduction in interest rates, the growth prospects for South Africa seem promising. Similar trends are anticipated in the key markets where South African banks operate.

Recently, the global credit ratings agency S&P upgraded the outlook for South African debt from “stable” to “positive,” stating that the upgrade “reflects our view that increased political stability following the May general elections and a push for reforms could enhance private investment and GDP growth.” While South Africa’s rating remains at BB-, below investment grade, a potential credit rating upgrade would lower borrowing costs for the government when financing its infrastructure projects.

South Africa’s banks have showcased their resilience amid challenging macroeconomic conditions, with aggressive expansion and digitalization initiatives driving increased revenues and profitability. As economic pressures ease and higher growth levels are forecasted, South African banks are well-positioned to sustain this positive trajectory.