South African Banks’ Sovereign Exposure Grows Amidst Weak Lending
South African banks are facing ever-higher sovereign exposure, strengthening the linkage between their credit profiles and that of the sovereign and reinforcing the longstanding sovereign constraint on the largest banks’ ratings, Fitch Ratings says.
Exposure has been increasing for over a decade, driven by banks’ subdued appetite for private sector risks in a weak macroeconomic environment, greater banking sector liquidity and government debt issuance, and capital optimisation strategies, according to Fitch.
The sector’s sovereign exposure is dominated by holdings of rand-denominated central government securities. It expanded to ZAR1,586 billion at end-1H25 from ZAR517 billion at end-2015.
Fitch said higher sovereign exposure relative to capital has increased the sensitivity of banks’ solvency to losses that could be imposed on creditors in the event of a sovereign default.
This reinforces the longstanding constraint on the ‘BB-’ Long-Term Issuer Default Ratings (IDRs) of the five largest banks by South Africa’s ‘BB-’/Stable Long-Term IDRs.
South Africa’s persistently weak macroeconomic environment has weighed on private sector lending and been a key driver of rising sovereign exposure.
Real GDP growth averaged only 0.7% over 2015–2024, reflecting deeply entrenched structural problems, including high levels of inequality, poverty and unemployment.
More recently, difficulties for state-owned enterprises have aggravated the situation, disrupting energy supply and weakening the performance of the logistics sector.
Banks’ credit profiles have been resilient, with the sector impaired loans ratio at 5.2%-5.5% during 2020-1H25 from 3.1% in 2015.
The banks have demonstrated heightened risk aversion, with sovereign exposure growth typically outpacing loan growth, which has averaged just 5.2% annually in nominal terms over the past decade.
Non-resident investor appetite for South African government bonds has decreased since the 2017 sovereign downgrade to sub-investment grade. Non-residents held about 40% of domestic government securities in 2017 but only about 25% in mid 2025.
This has contributed to increasing participation by domestic banks in government securities issuance, particularly as the outstanding stock of government bonds more than doubled from about ZAR1,250 billion at end 2017 to about ZAR3,000 billion at end-1H25.
Banking sector liquidity conditions and the South Africa Reserve Bank’s monetary policy have encouraged the rising sovereign exposure.
The new monetary policy implementation framework, introduced in 2022, and further initiatives in 2023-2024 have resulted in a larger liquidity surplus, which banks have partly channelled into government securities. The banks’ sovereign exposure increased to 18.8% of sector assets at end-1H25 from 10.7% at end-2015.
For the largest banks, exposure increased even more significantly as a percentage of total equity as many pursued capital optimisation strategies, Fitch said.
Analysts stated that this is reflected in the sector’s total equity/assets ratio declining to 7.4% at end-1H25 from 8.9% at end-2017.
The increased sovereign exposure contributed to a fall in the sector’s risk-weighted asset density to 45.6% at end-2024 from 51.8% at end-2015 as rand-denominated government securities have a zero risk-weight. Ecobank Gets $200m Sustainability-Linked Loan from European DFIs
