By Tumi Loate

Gross domestic product (GDP) growth is a critical barometer of a nation’s economic health, reflecting the overall vitality of economic activity. When GDP expands, businesses see a rise in demand, consumer spending increases, and production ramps up. This growth creates a greater need for capital, which banks supply through loans and other financial products.

In turn, banks benefit from this expansion as it leads to more transactions, investments, and an increased demand for financial services—ranging from working capital to infrastructure funding and individual lending. In a growing economy, the banking sector plays a pivotal role in sustaining and promoting that growth. By facilitating the flow of capital, enabling investments, and supporting business expansion, banks serve as intermediaries between savers and borrowers.

The health of the banking industry not only reflects the economy’s performance but also acts as a catalyst for further economic activity. This symbiotic relationship between GDP growth and banking sector performance drives a dynamic, cyclical process—each reinforcing the other.

South Africa: A turning point for growth

In South Africa, the link between GDP growth and banking sector performance is particularly significant as the country seeks to overcome challenges such as stagnating growth, high unemployment, and a decline in investment. With improvements in political stability and a more favourable business climate, South Africa is charting a path toward a more promising growth trajectory.

By November 2024, business confidence surged to its highest point since 2015, signalling a positive shift in the country’s economic outlook. Corporate loan growth accelerated to 9.2% year-on-year, reflecting the country’s improved business environment. Pro-business reforms, political stability, and a renewed focus on infrastructure investment have created an environment that encourages businesses to plan for growth and expansion.

Greece’s macroeconomic recovery took root after the debt crisis of the early 2010s. Years of recession, austerity measures, and high public debt left the country in economic turmoil, but through significant reforms, financial assistance, and a return of market confidence, Greece has stabilised. In quarter three 2024, Greece's GDP grew by 2.3% year-on-year, supported by improvements in key economic indicators such as employment, industrial production, and consumer spending. The unemployment rate fell to 9.5%, its lowest level since 2009, while the vacancy rate has risen, reflecting labour shortages in certain sectors, notably construction, tourism-related services, and high-skill industries.

This positive momentum has been transformative for Greece's banking sector, which had struggled for years due to high levels of non-performing loans and limited lending capacity. With stronger capital adequacy and a more favourable regulatory framework, Greek banks are now in a position to extend credit more widely to businesses and consumers. Corporate loan growth (annual growth of 14% to December 2024) has particularly flourished, as businesses seek financing for expansion and innovation.

India’s GDP growth has been one of the most resilient in the world, even amid global challenges. From a rapidly expanding services sector to growth in industrial output and agriculture, the country’s diverse economy has shown remarkable adaptability.

In 2024, India’s GDP growth forecast remains strong (Reserve Bank of India forecasting GDP growth of 6.7% for 2025-26) with expectations of steady expansion driven by both domestic consumption and external investments. India’s banking sector is intrinsically linked to its economic growth, with each fuelling the other in a positive feedback loop.

As the economy expands, the demand for banking services—whether for business financing, consumer loans, or infrastructure development—grows in tandem. Furthermore, India’s push for financial inclusion, exemplified by initiatives like Pradhan Mantri Jan Dhan Yojana (PMJDY), has brought millions of previously unbanked citizens into the formal banking system. This expansion has spurred economic activity by giving individuals and small businesses better access to credit and savings accounts.

China's banking sector and GDP growth have faced significant challenges in recent years, reflecting broader trends in the economy. Economic growth slowed to 3.9% in 2024, a sharp decline from the double-digit growth seen in previous years. While the banking sector remains integral to economic activity, it is grappling with rising non-performing loans, tighter credit conditions, and a general economic slowdown.

As the economy decelerates, the banking sector, which once fuelled China’s rapid expansion, is now struggling to maintain momentum in the face of these economic headwinds. These challenges are not only a reflection of the country's economic slowdown but are intricately tied to the broader difficulties facing the Chinese economy.

While a favourable macroeconomic environment is undoubtedly crucial, it's equally important to consider how market valuations account for future loan growth and bank earning trajectories. As economies recover, even the most risk-averse banking stocks may become more attractive, as the broader recovery supports profit growth across the sector and helps close valuation gaps.

When assessing banks, it's not just about the broader economic conditions but how valuations are positioned relative to anticipated growth. The right entry point for valuations, which accounts for the trajectory of loan demand, credit quality, and profitability, can make all the difference in investment returns.

South African and Greek banks stand out as compelling opportunities in this context. Both countries are making significant strides in improving their economic outlook, and their banking sectors are well-positioned to benefit from these positive trends. In contrast, Indian bank valuations appear to have already priced in a highly optimistic growth trajectory, leaving little room for significant upward re-rating; while uncertainty continues to cloud the outlook for China, making its banking sector a more cautious investment at this time.

Tumi Loate is a portfolio manager at 36ONE Asset Management and co-portfolio manager of the PPS Managed Fund

* We are pleased to announce that the PPS Managed Fund, managed by 36ONE Asset Management, has been nominated for a 2025 Raging Bull Award in recognition of its exceptional risk-adjusted performance over the past five years. This marks the fund’s second nomination and is a testament to the dedication and expertise of the team.

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