Three South African banks set to boom

Foord Asset Management analyst Byron Jackson-Miller said South African banks have delivered solid returns since their post-Covid-19 lows.

However, he explained that the operating environment has become increasingly complex as economic growth remains weak and competition grows.

“Banking profit margins tend to compress whenever economic growth falters and bad debts start to expand,” Jackson-Miller said. 

“With cost-cutting opportunities now largely exhausted, it’s important to be conscious of the specifics of each business.”

This is why Jackson-Miller advocates for selective positioning rather than blanket exposure in this sector.

He explained that, while credit growth and impairments will drive short-term share price direction, medium-term winners will be banks with technological agility, fee resilience and disciplined capital allocation. 

“An internal culture that can adapt to change will be important,” Jackson-Miller said. “In a low-growth economy, owning the price-setters – not the price-takers – remains the surest way to compound shareholder value.” 

Specifically, he believes Standard Bank, Capitec, and FirstRand have what it takes to withstand the headwinds in South Africa’s highly competitive banking space.

He explained that Standard Bank, in particular, is set to benefit from its pan-African franchise, which is difficult to replicate and drives earnings diversity.

In addition, Standard Bank’s corporate and investment banking divisions position the company well for any infrastructure-led upswing. 

This echoes comments made by ratings agency S&P earlier this year in its South Africa Banking Outlook 2025.

The firm said improving economic reform momentum driven by the Government of National Unity (GNU) and continued progress in addressing infrastructure deficiencies could bolster South Africa’s economic prospects.

In particular, S&P said planned economic reforms under the GNU, which primarily focus on addressing infrastructure deficits, will create lending opportunities for banks. 

Jackson-Miller said Standard Bank is well-positioned to capitalise on this trend and expects steady cash-flow growth from this blue-chip company, which he believes is still trading on an attractive valuation.

He also sees strong potential in Capitec and FirstRand – but for different reasons.

“Capitec offers room for growth among its 24 million clients, with embedded services and SME disruption following a proven model,” Jackson-Miller said. 

“FirstRand, on the other hand, remains best-of-breed and is well positioned to continue to win business from weaker competitors in a tough operating environment.”

Overall, Jackson-Miller believes Standard Bank’s continental network, Capitec’s platform model, and FirstRand’s data-driven culture position them well for shareholder value.

Four themes for South Africa’s banking industry

Jackson-Miller identified four major themes in the local banking industry that will affect market share and investment outcomes among South Africa’s banks.

Firstly, he pointed to the strong growth of digital payments in South Africa, particularly in light of the Reserve Bank’s PayShap project.

This project enables instant, real-time transfers between bank accounts and mobile wallets and is designed to reduce cash usage.

“Fee income is at risk for incumbents, but there are opportunities,” Jackson-Miller said. 

“To capture this payments trend, Capitec is rolling out its white-and-blue contactless payment terminals to small and medium enterprises (SME), priced 50% cheaper than peers.”

The second theme is SME banking, for which Jackson-Miller believes Capitec is also well-positioned to capitalise on.

He said Capitec is aggressively expanding into the underserved bottom end of the business banking market, while Investec is bringing its private banking service levels to slightly larger businesses.

“Without legacy IT systems, these challengers enjoy a cost advantage that incumbents must work to overcome,” Jackson-Miller said.

Thirdly, he pointed to leadership changes as a major trend among South Africa’s major banks.

In 2024, Absa, Nedbank and FirstRand underwent significant leadership changes, with Capitec set to follow later in 2025.

Jackson-Miller said this points to a cultural overhaul in the sector, with some banks expected to see a renewed focus on internal transformation and strategic renewal.

The fourth theme Jackson-Miller identified is non-lending ecosystems, as banks try to diversify their income streams by looking beyond traditional lending.

He explained that local banks are increasingly looking beyond traditional lending for growth, which can be seen in many institutions’ push for app traffic through value-added services and embedded products.

“Nothing knows you better – or gets more of your attention – than your banking app,” he said. 

“FirstRand and Capitec are already using client transaction data to undercut external providers on services like insurance and airtime, with foreign-exchange remittances emerging as a potential next frontier.”

Issued on Daily Investor by Bianke Neethling | https://dailyinvestor.com/investing/94155/three-south-african-banks-set-to-boom/