South African mid-tier banks are entering a stabilised performance phase in which growing non-interest revenue (NIR) has become the primary driver of value creation, as persistent low interest rates continue to compress net interest margins (NIM).
According to the latest South African Mid-Tier Banking Report released by BDO South Africa, the sector is undergoing a strategic shift away from reliance on high interest rate volatility toward more sustainable, diversified revenue streams.
The report analyses key players in the segment, including GoTyme Bank, Discovery Bank, African Bank, Finbond Mutual Bank, and GBS Mutual Bank.
NIM Compression and the Funding Squeeze
Mid-tier banks are moving away from high-yield, unsecured lending that previously delivered “extreme spreads” of over 30%. As these institutions diversify into more competitive secured lending and SME financing to de-risk their portfolios, net interest margins are normalising toward a more sustainable range of 5% to 15%.
While lending rates have declined in the low-interest environment, the cost of funds (CoF) has remained elevated. Many banks are still servicing expensive fixed-term deposits locked in during the 2023/24 interest rate peak, creating a mismatch between high funding costs and lower returns on assets.
Intensifying Competition for Deposits
Competition for retail deposits has intensified, with mid-tier banks not only battling each other but also competing against attractive retail investment products. To retain liquidity and meet statutory requirements, several institutions have been forced to offer premium rates on deposits, further squeezing net interest margins.
Loan Book Recovery Gains Momentum
After muted growth in early 2024 due to high borrowing costs, mid-tier banks recorded a strong recovery in loan books by late 2025. Total private sector credit extension reached a three-year high of approximately 8.7%, driven largely by increased corporate lending in renewable energy and infrastructure projects. Household credit also began to recover, with rising demand for vehicle finance, home loans, and retail credit as lower repo rates took effect.
Strong Capital and Liquidity Positions
The sector remains well capitalised, with mid-tier banks maintaining robust liquidity buffers. Between FY2023 and FY2025, capital adequacy ratios showed a modest decline, largely reflecting strategic deployment of capital to support loan book growth and selected acquisitions rather than underlying weakness. Liquidity coverage and net stable funding ratios continue to comfortably exceed regulatory requirements.
Strategic Outlook for 2026 and Beyond
Looking ahead, mid-tier banks face several key watchpoints:
- Geopolitical and interest rate risks: Ongoing tensions, particularly in the Middle East, could keep funding costs elevated for longer, putting further pressure on margins and loan growth.
- Lending rate reform: The South African Reserve Bank’s (SARB) planned replacement of the Prime Lending Rate (PLR) with the SARB Policy Rate (SPR) will require significant adjustments to systems, contracts, and risk models.
- Customer acquisition challenges: With customer loyalty declining due to digital offerings from big banks and fintechs, mid-tier banks will need to leverage AI and personalised products tied to life events to attract and retain clients.
- MSME lending opportunity: The underserved business and micro, small, and medium enterprise segment presents a significant growth avenue, as larger banks have traditionally neglected this market.
- Rising competitive disruption: New entrants, including retailers and global fintech companies, are expected to intensify pressure through technology and large existing customer bases.
The report emphasises that success in this environment will depend on aggressive revenue diversification. Mid-tier banks are increasingly pivoting toward non-interest revenue streams by expanding into transactional services, payments, insurance, wealth management, and loyalty-linked ecosystems.
“Mid-tier banks are transitioning from a risk-management focus to performance-driven growth,” the BDO report notes. “Those that successfully optimise operations, diversify revenue, and embrace innovation will be best positioned to extract sustainable value in the evolving low-interest rate cycle.”
Full report here