Mid-tier banks in battle to extract value in a low-interest rate cycle

South African mid-tier banks have entered a stabilised performance phase where the low interest cycle is shifting them to grow non-interest rate revenue (NIR) as the primary value driver.

This is a strategic shift from when they were traditionally operating in an environment of high interest rate volatility and elevated funding costs which has suppressed net interest margin (NIM), according to insights from the latest South African Mid-Tier Banking Report released by BDO South Africa.

The report covers these key players: GoTyme Bank, Discovery Bank, African Bank, Finbond Mutual Bank and GBS Mutual Bank.

Key insights:

Net interest margin (NIM) compression and the funding squeeze

There is a structural shift in NIM as high-margin specialists move away from high-yield, unsecured “extreme spreads” (historically 30%+). As these players diversify into more competitive secured lending and SME markets to de-risk their portfolios, margins are naturally gravitating toward a more sustainable 5%–15% range. While lending rates have fallen, Cost of Funds (CoF) has remained high, creating a persistent upward trend in funding expenses across the period. The sector is grappling with “expensive” liquidity locked in during the 2023/24 rate peak. High-yield fixed-term deposits have yet to mature and reprice, meaning banks are still paying peak-cycle interest on liabilities while receiving lower repriced returns on assets.

Competition for deposits

The struggle for retail liquidity has intensified as mid-tier banks compete not only among themselves but also with high yielding retail investment products. To prevent capital flight and maintain statutory liquidity ratios, many institutions have been forced to offer premium deposit rates, further elevating the average cost of funds and thinning the net interest margin spread.

Loan book dynamic: from muted to acceleration

After a period of subdued growth in early 2024, due to high borrowing costs, the mid-tier banking market saw a significant recovery in loan books by late 2025, with total private sector credit extension hitting a three-year high of approximately 8.7%. This momentum was primarily driven by a surge in corporate lending for renewable energy and infrastructure, while household credit began a late-stage recovery as lower repo rates finally stimulated increased demand for vehicle finance, home loans and retail originations.

Capital adequacy and liquidity position

Between FY2023 and FY2025, the mid-tier banks reflect a sector that remains well capitalised and maintains strong liquidity buffers, despite operating within the aggressive “performance” phase of the current credit cycle. While capital adequacy ratios have shown a modest moderating trend, this largely reflects the strategic deployment of capital to support loan book expansion and selected acquisitions rather than financial strain. On average, the segment demonstrates a highly liquid position, with net stable funding and liquidity coverage rations comfortably exceeding regulatory requirements.

Pushing performance driven growth

The mid-tier banking sector is in a period of transformation, moving from a focus on measured risk management toward performance-driven growth. Banks are leveraging precision in credit assessment, operational optimisations, and behavioural insights to build resilient foundations, whilst simultaneously pursuing scale, portfolio diversification, and innovative lending models to enhance returns. The various banks’ lending strategies reflect differing balances struck between disciplined credit management and aggressive expansion.

Forward-looking outlook: Key strategic watchpoints

• Geopolitical tensions and interest rate risk, particularly the conflict in the Middle East have created new uncertainty for South Africa’s economy. This means funding costs for banks may stay high for longer, squeezing profit margins and slowing loan growth, particularly for mid-tier banks.
• Plans by the SARB to modernise the lending rate framework by replacing the Prime lending rate (PLR) with the SARB policy rate (SPR) as the main reference for loans, means that banks will need to adjust their systems, contracts, and risk models to align with the new benchmark.
• Customer acquisition will require personalisation as mid-tier banks can no longer solely rely on customer loyalty. With large banks going digital and Fintechs taking market share, loyalty is fading. To compete, these banks must embrace AI to tailor products and services to customers’ life events.
• Greater focus on business and micro, small, and medium enterprises (MSMEs) lending, a segment which remains underserved by larger banks. This creates an opportunity for smaller and digital-only banks to expand loan books and grow their customer base.
• Competitive disruption and ecosystem evolution, driven by the entrance of new competitors such as local retailers and global Fintech companies. By using technology, large customer bases, and digital platforms, these newcomers are expected to put more pressure on mid-tier banks, who already face tough competition from the bigger banks.
• Revenue diversification and fee-based ecosystems will require aggressively pivoting toward NIR, and away from traditional interest income, by integrating diverse offering, such as transactional services, payments, insurance, wealth management, and loyalty-linked rewards into their core platforms.