South African banking in 2025 requires more than resilience, it needs reinvention

In brief

• South African banks remain profitable, but structural pressures demand more than resilience.
• Reinvention is essential: from tech strategy to capital deployment and customer innovation.
• 2025 outlook is mixed – opportunities exist, but only bold, integrated action will unlock value.

South Africa’s banking sector has long been an example of resilience, weathering economic headwinds, regulatory pressures, and shifting consumer expectations. Last year, this resilience was once again on display as major banks delivered solid financial performance despite a macroeconomic environment characterised by declining interest rates, sluggish growth, and intensifying competition. But as our latest EY South African Banking Performance Analysis reveals, resilience is no longer enough. The next chapter for South African banks will be defined by reinvention.

Our analysis, drawing on both reported financials and benchmarked global data, shows a sector at a pivotal moment. Profitability remains intact, capital buffers are strong, and digital transformation continues apace. Yet beneath the surface, deeper structural challenges are emerging. The pressure to unlock value, maintain relevance, and accelerate transformation is mounting, with the path forward requiring bold, proactive change.

The state of play: Solid foundations, intensifying pressures

At a glance, the sector’s financial footing remains sound. Most banks sustained profitability in 2024, thanks in part to non-interest income growth that helped cushion the blow of tightening net interest margins. Capital adequacy ratios are healthy, and credit quality has shown signs of improvement.

However, operational pressures are intensifying. Cost growth continues to outpace revenue growth for many players, leading to negative operating jaws. Rising technology and compliance costs are putting pressure on the bottom line.

Meanwhile, customer expectations are changing fast, and the entry of digital-only banks and embedded finance platforms is challenging the traditional value proposition.

The combination of structural inefficiencies and a more crowded, digitised marketplace means the industry can no longer rely on incremental improvement. A deeper strategic reset is needed.

Five imperatives for future competitiveness

Our 2024 analysis points to five critical imperatives that banks must embrace to move from resilience to long-term competitiveness:

1. Operational reinvention must deliver more than efficiency
   Cost optimisation alone will not secure future success. Banks must reimagine operating models to be more agile and customer-centric. This includes accelerating digitisation across the value chain, especially in lending, onboarding, and collections. Furthermore, they need to shift from mere branch reduction to a complete rethinking of physical networks in favour of digital-first engagement.
2. Technology investment requires strategic intent
   While IT spending has increased, returns on digital investments remain uneven. It is no longer about investing in technology for technology’s sake. Banks must set clear performance indicators that link tech spend to customer and financial outcomes. The strategic use of generative AI (GenAI) offers new opportunities to enhance operational efficiencies and improve customer experiences, but only if deployed with strategic intent and supported by internal capability.
3. Risk, regulation, and resilience must be integrated
   Compliance expectations are escalating, with new regulatory focus on climate risk, ESG disclosures, and anti-financial crime. At the same time, systemic risks are becoming more complex. Banks must embed real-time risk analytics into decision-making, align capital planning with economic and climate risks, and upgrade governance models to keep pace with their evolving operating environments.
4. Capital strategy must enable growth, not just compliance
   While capital buffers remain strong, low loan-to-deposit ratios and subdued lending volumes indicate underutilised capacity. Banks have an opportunity to redeploy ‘lazy capital’ into growth areas such as SME financing, infrastructure projects, and new segments unlocked by policy reforms. A modern capital strategy must balance risk prudence with proactive market participation.
5. Customer-centric innovation must go deeper than digital
   Digital adoption is growing, but genuine differentiation remains limited. Consumers increasingly expect hyper-personalised, seamless experiences, not just functional apps or loyalty programmes. Banks need to harness data more effectively, design journeys around the customer rather than the product, and partner with FinTechs and ecosystem players to expand their value propositions.

Outlook for 2025: cautious optimism, complex choices

Looking ahead, there are both tailwinds and headwinds shaping the sector’s trajectory.

On the positive side, macroeconomic indicators suggest some relief. Easing inflation and lower interest rates will support household affordability and credit growth. Regulatory developments, including the anticipated First Loss After Capital (FLAC) issuance framework and ongoing retirement reform, are set to open new commercial opportunities. Infrastructure investment, too, could unlock fresh demand for banking services.

However, structural risks persist. The FATF grey listing continues to dampen investor confidence. Digital-native banks are gaining ground, particularly among younger and price-sensitive customers. And compliance burdens are rising, especially in ESG and risk governance areas. Navigating this mixed environment will require clarity of purpose and disciplined execution.

A call to action

The banks that lead in the next cycle will not be those with the lowest cost-to-income ratios or the highest Tier 1 capital. They will be the institutions that successfully rewire themselves for adaptability, relevance, and long-term value creation. That means aligning purpose with performance, integrating strategy with technology, and building customer relationships rooted in trust and impact.

EY remains committed to supporting South Africa’s financial institutions in this journey. Our report offers a diagnostic view of the present, but more importantly, it is a catalyst for action. The road ahead demands reinvention, and now is the time to act.A

In summary

To thrive in a shifting landscape, South African banks must go beyond resilience—embracing reinvention, strategic agility, and deeper customer relevance.