S.African banks weather structural hurdles

South Africa's banking sector is facing a complex economic outlook in 2025, with challenges like net interest margins under pressure and uneven loan growth. According to the 2025 Banking Peer Report by BDO, banks are responding to these challenges through digital investment, credit risk management, and strategic realignment. Kevin Hoff, Head of Banking at BDO South Africa, joined CNBC Africa to discuss the findings of the report. Digital investments have been crucial for banks in managing costs and driving operational efficiency. Banks are flattening or even reducing headcount by leveraging digitization to automate manual processes. Additionally, the big four banks in South Africa are cutting down traditional brick and mortar branches to reduce costs and create new channels for customers. The focus is shifting from cost containment to customer centricity, aiming to expand the customer base for sustainable growth. The global uncertainty and currency volatility have raised concerns about the capitalization and liquidity of South African banks. However, as per the report, the large banks in the country are well-capitalized and liquid, surpassing the thresholds set by the Reserve Bank. The introduction of the Corporation for Deposit Insurance (CODI) in 2024 provides an extra layer of protection for depositors, enhancing market stability. With traditional revenue streams like net interest margins shrinking, banks are exploring new avenues for sustainable growth. Partnering with fintech companies and venturing into joint ventures are helping banks access new markets and attract a diverse client base. These strategic moves are aimed at driving innovation, agility, and efficiency among the banks in South Africa. Fintechs have emerged as disruptors in the banking landscape, challenging traditional banks to enhance their processes and customer experiences. Banks are now viewing fintechs as partners rather than competitors, leveraging their networks and trust to foster innovation and speed in service delivery. The evolving partnership between banks and fintechs is expected to benefit customers through improved efficiencies and experiences. Despite income pressures, South African banks have maintained stable cost-to-income ratios through strategic cost-cutting measures. Digitization continues to be a key driver in enhancing efficiencies and reducing costs for banks. However, the focus is now shifting towards revenue growth through digitization and fintech partnerships to manage the cost-to-income ratio effectively. In response to household pressures and muted retail loan growth, banks are reevaluating their credit scoring strategies to promote financial inclusion. By leveraging fintech platforms and revising front ends, banks aim to tap into unbanked markets and expand their presence in the SME sector. While stricter credit criteria may increase risk profiles, effective credit risk management has contributed to a decline in credit loss ratios. Looking ahead, South African banks must prioritize cost containment, digital transformation, and talent retention to remain competitive and relevant in a dynamic market. The shift towards digital strategies, upskilling personnel for emerging roles like data scientists and AI experts, and focusing on customer-centric growth are crucial strategic priorities for banks to navigate the evolving banking landscape successfully.