Banking System Outlook – South Africa

Outlook remains stable on improving macro conditions and stable financial metrics

Our outlook for South Africa's (Ba2 stable) banking system is stable. Despite the country's structural inefficiencies and our expectation of relatively slow economic growth in 2026, at 1.6%, operating conditions are gradually improving. Easing of inflation and interest rates, the country's removal from the Financial Action Task Force (FATF) grey list, stabilisation in electricity supply and improvements in rail and port operations will support financial stability and banks' credit strength.

We expect banks' key financial metrics to remain broadly stable. Nonperforming loans (NPLs), which stood at 4.9% as of October 2025, are likely to fall as interest rates ease, although still high consumer debt service costs will prevent a substantial drop. Lower loan-loss provisioning costs and moderate credit growth will offset declining net interest margins (NIMs). While capital buffers may drop slightly as capital is managed effectively, we expect aggregate sector Common Equity Tier 1 (CET1) ratios to remain above 13%. Sector funding is likely to remain stable, despite banks' dependence on wholesale deposits. High exposure to the sovereign suggests banks' credit quality will remain linked to that of the government.

Moody's Ratings

Financial Institutions

Stable outlook reflects improving macro conditions and solid but stable financial metrics

Operating conditions are gradually improving. Easing of interest rates, the re-anchoring of inflation expectations around the new lower target of 3%, stabilisation in electricity supply, improvements in rail and port operations and removal of the country from the FATF grey list will support the operating environment and create new business opportunities. Nonetheless, risks remain from high government debt and the country's low growth potential, given ageing infrastructure, a sluggish labour market and a still weak state-owned enterprise (SOE) sector.

We expect a modest improvement in loan performance. We expect nonperforming loans to reduce from 4.9% of the aggregate loan book as of October 2025. Borrowers' repayment capacity will be supported by interest rate cuts, lower inflation and higher corporate profitability, although still stretched consumer finances (see exhibit 6) will prevent a sharp fall in NPLs. Although the corporate sector is relatively resilient, given its lower leverage, certain segments such as commercial real estate and state-owned enterprises, continue to face tough operating conditions. Banks also remain heavily exposed to government securities – at around 2.3x banking-sector equity – which links their credit strength to that of the South African government (Ba2, stable).

Capital will remain stable. Sectorwide Common Equity Tier 1 (CET1) was 14.0% of risk-weighted assets as of October 2025, comfortably above the minimum regulatory requirements and internal targets of between 11%-12% for the major banks. Over the next year, we expect a modest drop in capital metrics – resulting from slightly higher dividend payouts and share buybacks – as banks remain focused on effective capital management. We do, however, expect CET1 to remain above 13% as a new 1% countercyclical buffer requirement was introduced in January 2026. The CET1 ratio of South African banks remains below the EU average of 16.3%, but risk-weighted assets density is higher at 51% compared with 35%.

Profits will increase modestly. For 2026 we expect a 5%-10% increase in bottom-line profit to translate into broadly stable profitability metrics, with a return on average assets of around 1.2%. Earnings will be supported by credit growth of 5%-7% and a drop in provisioning charges to around 0.8% of gross loans – mitigating a squeeze on net interest margins from declining interest rates. Banks will remain committed to cutting costs, but also to ongoing digital transformation, including through investment in new technology and payment systems, AI and cybersecurity. We expect the sector's cost-to-income ratio to remain in the 55%-60% range.

Banks to maintain good liquidity buffers and stable funding, but reliance on wholesale deposits will remain substantial. South African banks maintain strong Basle III liquidity ratios, with the liquidity coverage ratio at 160% and Net Stable Funding Ratio (NSFR) at 116% as of October 2025. We expect these ratios to be broadly maintained, despite some pressure on the NSFR from the decision of the South African Reserve bank (SARB) to eliminate the 35% Available Stable Funding factor to funding received from financial institutions with a maturity of less than six months. Major banks also maintain robust liquidity contingency plans in case of need, while the SARB allows excess supply of bank reserves in the market as part of its Monetary Policy Implementation Framework. However, banks remain dependent on wholesale funding, with deposits from financial institutions making up around 40% of total funding, which are confidence sensitive, of shorter maturity and less diversified compared with household deposits. The associated risks are, however, partially offset by a closed-rand system, whereby no bank can clear the rand outside of South Africa.

The country's recently introduced Resolution Framework will require systemically important banks to issue a new class of loss absorbing instruments (Flac)¹; this is likely to be set at around 9% of risk-weighted exposure, with an additional institutional-specific requirement to be established later. We expect large South African banks to start issuing Flac instruments in 2026 by rolling-over maturing locally-issued senior unsecured notes into these new loss absorbing instruments.

We attribute no government support uplift in bank ratings, but the new Resolution Framework is beneficial to senior creditors. South African authorities are likely to remain unwilling to bailout bank creditors, considering the government's limited capacity given fiscal challenges and as informed by the new Resolution Framework. The latter is nonetheless credit positive for senior creditors and depositors, because they will be protected from losses in a bank failure by more junior creditors and loss-absorbing Flac instruments.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the issuer/deal page on https://ratings.moodys.com for the most updated credit rating action information and rating history.

Banking System Outlook – South Africa: Outlook remains stable on improving macro conditions and stable financial metrics

Moody's Ratings

Financial Institutions

Exhibit 1: Aggregate key indicators for rated South African banks

In line with the Rating Methodology: Banks, updated November 2025, the ratios "less-stable funds to tangible banking assets" and "core banking liquidity to tangible banking assets" are stated from annual 2024 onward. In addition, only ratios from annual 2024 onward apply reported risk weights for all exposures, discontinuing our previously applied standard adjustment for certain government securities.

Source: Moody's Ratings

Rating universe

We rate seven commercial banks in South Africa, which together account for more than 90% of banking sector assets. Large South African banks typically operate via a holding company structure, whereby the South African bank is a subsidiary of the holding company, with the latter also owning any other banking subsidiaries in Africa and non-banking operations in South Africa.

Exhibit 2: South African banks' Baseline Credit Assessment (BCA) distribution as of February 2026

[Chart showing distribution of ratings across baa2 and ba1 categories]

Source: Moody's Ratings

Exhibit 3: Rated South African banks as of February 2026