Bank shares punished more than during financial crisis

• There are no liquidity problems, says Patrice Rassou

The falls in the country’s banks’ share prices, worse than during the financial crisis a decade ago, mean they are an attractive proposition even as they are set to halt dividends for the next two years, says Patrice Rassou, chief investment officer of Ashburton Investment.

Though banks will probably not pay dividends for the next two years as they work through the worst of the pandemic’s financial fallout, they remain attractive on a five-year view, said Rassou.

His top picks are RMB Holdings, with stakes in FirstRand and RMH Property, and the continent’s largest home-grown financial institution, Standard Bank Group.

Both are selected for their perceived resilience to the slowdown in the economy.

But the market expects a sharp deterioration in loan books with consumers and businesses hit by the lockdown and slow reopening of the economy. “Twelve years ago we had a mortgage-lending crisis that morphed into a liquidity crunch,” he said.

“Going into the corona crisis, the capital position of banks was clearly much stronger.

“There have been no liquidity problems and yet the sell-off has driven bank valuations lower than [during] the last global crisis,” said Rassou.

Rassou recently moved from Sanlam Investment Management (SIM) to lead Ashburton's investment team. Ashburton is part of FirstRand.

Share prices of the country’s four largest banking institutions by assets — Standard Bank, Absa, FirstRand and Nedbank — have been pummelled since the onset of the Covid-19 pandemic.

In the past three months Nedbank’s share price fell the most, down 56%.

FirstRand fared best, losing 43% of its value. Standard Bank and Absa are both down 46%.

At the end of April, Moody’s Investors Service shifted its outlook on the SA banking system from stable to negative, citing the expected sharp increase in bad debts as the economy moved into recession. “We expect problem loans to rise significantly from 4% of gross loan in February 2020 to above the level experienced during the 20082009 financial crisis, when problem loans peaked at about 6%,” said Moody’s.

The country’s banks have enjoyed unprecedented support from the regulator in the form of the Prudential Authority and the Reserve Bank.

Even before lockdown, the central bank increased the number of “windows” for the country’s clearing banks to access liquidity, making it much easier for banks to borrow from the Reserve Bank.

The Prudential Authority has temporarily lowered or eased a number of capital reserve requirements that will assist banks in navigating deteriorating loan books by not requiring them to post more capital.

This action has further been augmented by the introduction of the first phase of the loan guarantee scheme, which will encourage the banks to lend to businesses that are temporarily affected by the lockdown.

Rassou said that lower interest rates would also create challenges for banks.

“The profit banks make from the spread between deposit rates and loan rates keeps getting smaller as their margins are squeezed as interest rates fall. And we have been in a declining rate environment for some time now.

“Now add a huge global contraction in economic activity and we have a toxic mix for banks,” he said.

The Reserve Bank has been cutting interest rates aggressively since the beginning of the year, lowering its benchmark repo rate 225 basis points to 4.25% a year.

Investec economists expect the Bank to make a small cut of 25 basis points when its monetary policy committee meets on Thursday.