Why banks re­main a good bet

De­spite po­ten­tial threats to their mas­sive prof­its, the shares of­fer value

Finweek English Edition - - Companies & markets - BRUCE WHIT­FIELD

IN­VESTORS SEEK­ING VALUE on the JSE could do con­sid­er­ably worse than stock up on se­lected South African bank shares over the long term. Echo­ing War­ren Buf­fett that pe­ri­ods of mar­ket volatil­ity pro­vide longterm in­vestors with the op­por­tu­nity to top up their port­fo­lios, some sug­gest the cur­rent un­cer­tainty could pro­vide canny in­vestors with a buy­ing op­por­tu­nity.

“Pick a level, put in an or­der, the volatil­ity could go in your favour and you could find your­self get­ting very good value in this mar­ket,” says David Pea­cock, port­fo­lio man­ager at San­lam Private In­vest­ments.

Trad­ing on an av­er­age price:earn­ings mul­ti­ple be­low 12, bank shares ac­tu­ally of­fer bet­ter value now than they did a year ago. The mar­ket value of SA’s Big Four banks has nearly dou­bled to R380bn over the past three years. Only a small part of that growth has oc­curred in the past 12 months, with in­vestor sen­ti­ment favour­ing re­sources over fi­nan­cials and industrials dur­ing that time.

Bank val­u­a­tions haven’t kept pace with cor­po­rate per­for­mance. As­set growth across the banks has been healthy, rev­enues ro­bust and con­sumer bor­row­ing strong.

To end-De­cem­ber 2006, FirstRand grew head­line earn­ings 26% and Absa 25% – beat­ing an­a­lysts’ fore­casts; Stan­dard Bank re­ported growth of just un­der 20%.

Says one an­a­lyst: “They’re so con­ser­va­tive that you can hap­pily buy the shares and for­get about them for a cou­ple of years – there’s plenty of growth left.”

How­ever, fresh com­ments this month by SA Re­serve Bank Gov­er­nor Tito Mboweni that con­sumer bor­row­ing lev­els re­mained un­ac­cept­ably high and that in­ter­est rates would be used as a tool to com­bat in­fla­tion have caused re­newed jit­ters.

House­hold debt lev­els as a per­cent­age of dis­pos­able in­come have risen from 64% a year ago to around 73% cur­rently. Un­der pres­sure from the Bank, com­mer­cial banks re­cently signed a code of con­duct com­mit­ting to more re­spon­si­ble sales strate­gies in the un­se­cured lend­ing space.

While many bankers hail the in­tro­duc­tion of the Na­tional Credit Act as an op­por­tu­nity to level the play­ing fields be­tween them and SA’s mi­crolen­ders it will in­hibit their abil­ity to sell credit as ag­gres­sively as they have been do­ing over the past three years.

But de­spite the warn­ings and the neg­a­tiv­ity con­cern­ing con­sumer health, the re­cent spate of fi­nan­cial re­sults from SA’s ma­jor banks showed not only strong re­tail bank­ing growth but also a resur­gence in cor­po­rate lend­ing.

An­a­lysts are fore­cast­ing cor­po­rate and in­vest­ment bank­ing will more than make up for a slow­down in growth in the re­tail sec­tor, which re­mains the big­gest in­come gen­er­a­tor at both Absa and FirstRand. Stan­dard Bank gen­er­ates equal pro­por­tions of its in­come from re­tail and in­vest­ment bank­ing, while the cor­po­rate mar­ket gen­er­ates most of Ned­bank’s prof­its. Banks con­tinue to in­vest in in­fra­struc­ture and have been net creators of jobs in an ef­fort to keep up with in­creased busi­ness vol­umes. Ned­bank has seen the great­est num­ber of new jobs cre­ated – nearly 2 000 – though ad­mit­tedly from a low base af­ter three years of cuts. Absa has been most ag­gres­sive in its branch roll-outs, adding 31 in the 12 months to end-De­cem­ber, and a sub­stan­tial 1 218 new ATMs, giv­ing it four times as many points of pres­ence than Ned­bank, which con­sid­er­ably lags its peers in the re­tail arena.

While Ned­bank has the least num­ber of branches of the Big Four banks (it added 17 last year) it’s been in­no­va­tive in its at­tempt to cre­ate more points of pres­ence with­out in­cur­ring the cost of try­ing to match its peer group through costly branch roll-outs. Its newly re­branded Pick ’n Pay joint ven­ture – Go Bank­ing – has 333 points of pres­ence and putting its own branded per­sonal loans kiosks in other group stores.

While the out­come of the com­pe­ti­tion au­thor­i­ties’ in­ves­ti­ga­tion into the Na­tional Pay­ment Sys­tem re­mains un­cer­tain, an­a­lysts aren’t ex­pect­ing it to dra­mat­i­cally af­fect bank prof­its over the short term.

Banks have also quan­ti­fied the po­ten­tial ef­fect of the im­ple­men­ta­tion of the Na­tional Credit Act in just over two months. FirstRand says the NCA will cost it be­tween R300m and R400m in lost rev­enues – un­com­fort­able but not in­tol­er­a­ble.

BANKS... UN­CER­TAINTY PRO­VIDES BUY­ING OP­POR­TU­NITY

Source: I-Net Bridge

FI­NAN­CIAL PER­FOR­MANCE

Source: Com­pany re­sults

OP­ER­A­TIONAL DIF­FER­ENCES

Source: Com­pany re­sults

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