in depth banking
ASSESSING BAN COMPLICATED COVI
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Local banking stocks have been under pressure for a number of years, and the their insights about the investment outlook for this sector, which will be h
hough there are 19 locally registered banks doing business in South Africa, the banking sector continues to be dominated by five players, which together hold the majority of all assets in the sector. Any retail investor looking to pick a performer among local banks will almost certainly be weighing up their options from the big five. The banking sector has been under significant pressure for years, with expectations of economic recovery in SA continually deferred. In the second half of 2019, PwC, in its Major Banks Analysis report, said banks are sensitive to stresses in the domestic economy and the broader global economic context. Lacklustre growth meant heightened credit risk and subdued economic activity across all customer segments, which contributed to earnings pressure, the report said. And that was before Covid-19 and lockdown laid waste to remaining economic activity. According to the South African Reserve Bank’s (SARB’s) sector trends report from February, shortly before Covid-19 entered our consciousness, the sector controlled just more than R6tr in assets, 9.7% up on the prior year, with R4.4tr in gross loans and advances, R1tr in home loans and R986bn in term loans. Sector returns on equity were down from 15.9% to 14.3%, return on assets was down from 1.29% to 1.14% and the sector’s cost-to-income ratio had slid from 57.3% to 58.6%. Capital adequacy had also declined from 16.3% on average to 16.2%. Covid-19 wrought destruction on banking shares as investors weighed up the prospects of loan books turning bad, transactional activity grinding to a halt and the large-scale liquidation of investments to obtain much-needed cash. It is a bleak picture. Going by order of market capitalisation, FirstRand has shed 37.7% of its share price in 2020 to R221bn at a price-to-earnings ratio (P/E) of 7.7 times. Standard Bank has lost 44.8% of its value to R150bn and is trading at a P/E of 5.2.
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finweek 7 May 2020
Chris Steward Portfolio manager at Ninety One
Zaid Paruk Portfolio manager at Aeon Investment Management
Capitec, now worth R108bn, has lost 35.6%, though its P/E remains a sturdy and demanding 17. Absa is down to R67bn, having shed 67% of its value since the beginning of the year and is at a P/E of 4.5. Nedbank brings up the rear after losing 67% to be worth R43bn at a lowly P/E of 3.3. Some investors may take a look at the “cheap” valuations on offer in the sector but may be wary of how to sort the wheat from the chaff in an environment where seemingly every company has shed value in irrational sell-offs. Chris Steward, portfolio manager at Ninety One (previously Investec Asset Management), says a great deal of action in a very short time has changed the investment landscape materially. “Most banks reporting recently had recorded small single-digit earnings increments downwards or upwards for the last year, with Nedbank the weakest and FirstRand the strongest. But the global economy was looking reasonably supportive. “When stocks are sold off as aggressively as during March, relative performance becomes less pronounced because it looks like they have all been annihilated. Some may have outperformed, but it’s less noticeable,” he says. Before Covid-19 a quality bias in pricing was emerging, Steward says. “Banks with stronger capitalisation, better organic earnings generation, better performance track records of capital allocation and management delivery, like FirstRand, Capitec and to a lesser degree Standard Bank, were separated from the bottom performers by a good 20%.” According to Steward, cuts in interest rates – already greater by April than expected for the whole of 2020 – are generally negative for bank earnings, since free capital plus interest-free deposits are reinvested at lower rates. “In a traditional cycle banks get compensation from an uptick in credit as consumers and corporates take advantage of cheaper
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