Banks still preferred pick in stock basket
SA’s large banks continue to be some of the preferred picks in any basket of emerging market stocks, as was reiterated by JP Morgan on Monday. A review of the FTSE/JSE banks index chart shows current prices at levels last seen four and five years ago.
The profitability of the large banks, which are still the backbone of the economy, is deeply influenced by the overall level of economic activity. Investors have been well versed in what has been happening on that front for some time.
The large banks have also just sailed through a one-in-acentury storm, so they say. This led to losses from bad debts rising to levels above those seen during the global financial crisis. (Which was itself described as a one-in-a-century event.)
While the banks are not yet out of the woods as far as bad debts go, the encouraging speed at which the economy has rebounded to pre-pandemic levels provides some reason to be optimistic.
So what else do we know? Interest rates hitting multidecade lows has also eroded profitability by reducing the margin between the price banks can borrow and the price they can lend at. In addition, competition is increasing as new entrants open their doors. The leaner times have imposed efficiency on the banks. Operating expenses in many cases barely rose, or even declined marginally, as observed through the most recent earnings season.
All in all though, there appears to be an overwhelming amount of bad news priced into valuations over the past couple of years. Any positive upside, by way of a growing economy or better-than-expected performance from bad debts, could handsomely reward investors.
ADAPT IT LIVING IN ‘INTERESTING’ TIMES
To say the bidding war for Sbu Shabalala’s Adapt IT is “heating up”, “eventful” or “interesting” would not do justice to a company that has largely flown under the radar.
The company finds itself at its strongest in years and is the subject of two takeover bids valuing it at about R1bn, a large premium above its market cap just before any offer was made.
Yet the group finds itself vulnerable, with a founder embroiled in a scandal. He is alleged to have hired thugs to beat up his estranged wife’s partner, a scenario that can only be described as being straight out of a telenovela. The Sunday Times reported that the partner of Neo Shabalala — Sipho Nzuza — was in a critical condition and that Neo sought an interdict against her estranged husband.
Regarding the takeovers, two things can happen. The cloud hanging over Adapt IT, given Shabalala’s scandal, could scare away potential buyers. Or opportunistic parties could see this as a chance to swoop on the company at a time when its founder is at his weakest.
These latest disclosures come at an “interesting” time given the already eventful battle to take over Adapt IT. One suitor, Huge Group, has reportedly said its offer is still on the table.
THE COMPANY FINDS ITSELF AT ITS STRONGEST IN YEARS AND IS THE SUBJECT OF TWO TAKEOVER BIDS VALUING IT AT ABOUT R1BN