Africa’s biggest banks to face higher credit losses as global risks mount

Banks in Nigeria, South Africa, and Egypt are expected to face rising credit losses over the next two years, as the Middle East conflict, persistent inflation, and tighter global financial conditions put pressure on households, businesses, and lenders across Africa’s three largest banking markets, according to S&P Global.

In its Global Banking Outlook 2026 – Midyear Update: Emerging Europe, Middle East and Africa (EMEA), released on Tuesday, the agency said that while banking systems across the region remain broadly resilient, deteriorating operating conditions are likely to weaken asset quality and increase provisioning requirements.

“We expect many banking sectors in emerging EMEA—despite general resilience—will face increasing credit losses, as rising inflation weighs on household disposable income and corporate profitability,” the report said.

It warned that a prolonged Middle East conflict could amplify those risks, saying, “If the instability in the Middle East continues for a prolonged period, asset quality deterioration and the related increase in credit losses could be significant.”

Beyond the conflict, S&P identified uncertainty over US Federal Reserve interest-rate policy and weaker investor confidence in emerging markets as additional threats to banking systems across emerging Europe, the Middle East and Africa.

Among Africa’s largest economies, Nigeria is expected to be relatively insulated from the direct economic fallout of the Middle East war because of its status as a net oil exporter and an emerging producer of refined fuels.

“As a net oil exporter and an emerging producer of refined fuels, Nigeria is less exposed to the spillover effects from the Middle East war,” the firm said.

However, the report cautioned that domestic macroeconomic challenges continue to pose significant risks to lenders. It expects inflation, unemployment and poverty to remain elevated, while high interest rates and the withdrawal of regulatory forbearance continue to weigh on banks’ loan portfolios. “Additionally, the removal of regulatory forbearance and high interest rates will continue to weigh on banks’ asset quality.”

As a result, S&P forecasts Nigeria’s Non-Performing Loan (NPL) ratio will stabilise between six per cent and seven per cent in 2026, while credit losses remain elevated at between 2.0 per cent and 2.5 per cent.

Despite the expected deterioration in asset quality, the agency said Nigerian banks should be able to absorb the additional provisioning costs because of their strong earnings. “We expect most banks will be able to absorb the incremental provisioning requirements thanks to their strong profitability, even as average return on equity normalises at about 20 percent-23 percent in 2026, compared with an estimated 25 per cent in 2025.”

In Egypt, banks remain closely tied to the sovereign because of their large exposure to government-related assets. “Egyptian banks’ creditworthiness remains strongly linked to that of the sovereign. This is because banks’ exposure to the public sector reached about 61% of total assets as of Dec. 31, 2025,” the report noted.

S&P expects the Middle East conflict to slow Egypt’s economic growth and weaken private-sector credit demand. Combined with tighter monetary policy, this is projected to lift average credit losses to about 150 basis points over 2026 and 2027, compared with around 130 basis points in 2025.

South African banks are also expected to come under pressure as rising inflation and higher borrowing costs strain household finances. Inflation accelerated to 4 per cent in April from 3.1 per cent in March, prompting the South African Reserve Bank to raise its policy rate by 25 basis points in May.

Although infrastructure investment is expected to support lending growth this year, S&P forecasts credit losses will increase to between 90 and 110 basis points, while non-performing loan ratios rise to between 5.0 per cent and 5.5 per cent as households grapple with higher living costs and reduced loan affordability.

The report added that while fertiliser shortages could affect agricultural output, banks’ limited exposure to the sector means the impact on corporate credit quality should remain modest.

Overall, the global firm said banking systems across emerging Europe, the Middle East and Africa continue to demonstrate resilience, particularly in countries with strong capital buffers and ample liquidity.

However, it warned that prolonged geopolitical tensions, elevated inflation and tighter financing conditions are expected to increase credit risks across the region, with Nigeria, South Africa and Egypt all facing higher loan losses even as their banking sectors remain fundamentally resilient.