South African banks have delivered solid returns since the post-Covid lows. However, as economic growth remains weak, interest rates drift lower, and competition intensifies, the operating environment is becoming increasingly complex.
Against this backdrop, Byron Jackson-Miller, an analyst at Foord Asset Management, argues that selective positioning makes more sense than blanket exposure. “Banking profit margins tend to compress whenever economic growth falters and bad debts start to expand. With cost-cutting opportunities now largely exhausted, it’s important to be conscious of the specifics of each business.”
Among the select banking stocks that feature in Foord’s top-10 holdings, Standard Bank tops the list, says Jackson-Miller. “Standard Bank owns a pan-African franchise that is difficult to replicate, which drives earnings diversity. Its corporate and investment banking divisions also position it for any infrastructure-led upswing. We expect steady cash-flow growth from this blue-chip company still trading on an attractive valuation.”
Other banks on the list include Capitec and FirstRand. “Capitec offers room for growth among its 24 million clients, with embedded services and SME disruption following a proven model,” says Jackson-Miller. “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.”
Looking ahead, Jackson-Miller identifies four major themes playing out in the local banking industry that will affect market share and investment outcomes:
- Digital payments – The South African Reserve Bank’s PayShap project – instant real-time transfers between bank accounts or mobile wallets – is designed to reduce cash usage, which still accounts for more than half of all point-of-sale transactions. While over 80% of South Africans have a bank account, in half of these, cash is withdrawn as soon as it is deposited. “Fee income is at risk for incumbents, but there are opportunities” notes Jackson-Miller. “To capture this payments trend, Capitec is rolling out its white-and-blue contactless payment terminals to small-and-medium enterprises, priced 50% cheaper than peers.”
- SME banking – 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,” says Jackson-Miller.
- Leadership changes – “There is a cultural overhaul underway within the sector,” says Jackson-Miller, citing two recent executive shifts. “Jason Quinn’s move from Absa to Nedbank and Kenny Fihla’s arrival at Absa from Standard Bank suggest renewed focus on internal transformation and strategic renewal across the sector.”
- Non-lending ecosystems – Banks are increasingly looking beyond traditional lending for growth, eager to monetise app traffic through value-added services and embedded products. “Nothing knows you better – or gets more of your attention – than your banking app,” says Jackson-Miller. “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.”
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 adds.
Despite reducing their banking exposure, Foord remains a long-term investor in South Africa’s best franchises. “In a low-growth economy, owning the price-setters — not the price-takers — remains the surest way to compound shareholder value. Standard Bank’s continental network, Capitec’s platform model and FirstRand’s data-driven culture meet that threshold,” concludes Jackson-Miller.