Why banks remain a good bet
Despite potential threats to their massive profits, the shares offer value
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.