Or will a more cautious strategy pay off in tough times?
COULD STANDARD BANK be knocked off its perch as South African investors’ favourite banking share? Some analysts are beginning to question whether the group’s management may be just too conservative and to wonder whether it’s to the detriment of shareholders. It’s precisely that conservatism and reliability of management that for the past five years has made Standard SA’s most sought-after financial sector share. However, when you consider the share price performances of the country’s major banks year-to-date, Absa has been a firm favourite and continues to outperform relative to its peers. Based on the most recently available quarterly statistics, Standard Bank is the banking share most widely held by private and institutional investors. However, recent price moves suggest its popularity might be slipping – partly as a result of its surging bad debts. But the market has also been spooked by its decision to not provide earnings guidance for the second half of its financial year.
Traditionally, the group has prided itself on delivering a minimum of inflation plus 10% earnings growth. Earlier this year it cut that expectation to inflation plus 5% and later still, to matching inflation in the first six months of its current financial year. Then inflation neared 12% and Standard Bank delivered headline earnings per share growth of 7%: not out of line with its peer group but certainly a lot lower than it had indicated.
The results were negatively impacted by the group’s aggressive accounting practices, leading some analysts to question whether Standard is being overly cautious. In their most recent research report, analysts at Deutsche Securities point to the conservatism of Standard Bank’s management as an area of concern for investors. “During the buoyant environment, Standard Bank management was often quick to remind investors that its differentiated international strategy would see it outperforming during more challenging times.
“Considering that the international businesses have been the star performers in this result, we find it frustrating to see Standard Bank choosing to use these additional earnings to bolster provisioning rather than pass the benefit on to shareholders,” write analysts Mike Gresty and Voyt Kryzchlkiewicz.
Though Standard Bank CEO Jacko Maree is renowned for his prudent management style, concerns are building that despite a tough global and domestic environment the team may be too risk-averse.
“You can’t just change the rules when times are tough,” says Neil Brown, joint manager of Select Equity Investments at OMIGSA, which is overweight banks. “Its provisioning policy was set in stone four or five years ago: customers who are three payments behind are deemed to be in arrears. It’s 100% scientific – some of it will come back into profits next year.”
If Standard is too conservative, does that imply its peer group isn’t conservative enough? The market doesn’t think so. New money appears to be flowing predominantly to Absa and FirstRand. That’s despite the fact that the full impact of retail bad debts and proprietary trading losses at RMB will only be seen in its full year results (to endJune) in September.
The value of the Barclays tie-up is becoming apparent in the results of Absa Capital, but the group is restricted in its African growth plans by the fact it can’t grow into markets where its parent has a presence and it’s not likely to obtain local regulatory approval for a merger of its respective assets.
Maree says Standard Bank’s tie-up with 20% shareholder ICBC holds enormous promise. Around 20 Standard Bank staff members are relocating to Beijing. Some, including operation head Craig Bond, will be inside the ICBC HQ, giving them access to the Chinese group’s biggest clients. Standard Bank’s existing African footprint – the biggest of any SA group – and the appetite of Chinese companies to invest in Africa provide a promising blend of opportunities.
However, things are tough at home. The recent crop of results from SA’s biggest moneylenders illustrates what’s going on in the real economy. Consumer spending has plummeted. That’s affected borrowing and the ability of existing borrowers to pay their debts. However, banks have been providing clear guidance and have effectively managed expectations. Standard Bank booked a credit impairment charge of nearly R4,5bn, a 113% increase on the six months to June 2007. It reported a credit loss ratio of 1,27%, while both Nedbank and Absa kept theirs below 100 basis points. Most alarming in the Standard Bank retail results was the quality of its mortgage book – and the surprising R212m loss in that division.
Credit loss ratios have deteriorated markedly throughout the financial sector in the mortgage, asset finance and card divisions – where again Standard Bank performed worst, showing a loss ratio of 9,44% and outside its own accepted internal range of 6% to 9%.
Results from SA’s other major banks were also far from spectacular in the first six months. Retail divisions struggled and results across the board were bolstered by corporate and investment banking divisions.
Nedbank has the country’s smallest retail banking footprint, which limits its ability to generate the sort of fee income levied by its peers. Some analysts also argue its efforts to drive growth into the lower LSM market segments over the past four years have cost Nedbank in terms of higher bad debts. Its corporate strategy is focused on driving lending, which generates healthy interest income, but lower fees than its peers, while its higher relative exposure to small businesses is expected to see bad debts in that segment rise sharply over the next 12 to 18 months.
Despite it having the highest exposure to domestic retail banking of SA’s Big Four banks, Absa’s bad debts, sharply higher than previous reporting periods, remained in check relative to its competitors. Analysts are eyeing the performance of Absa Capital, which grew earnings an impressive 32% in first half 2008.
A research note from Nedcor Securities doesn’t expect any significant outperformance by any one of SA’s major banks, but says Absa is “marginally the least-preferred” share over a 12-month view. While that might sound contradictory based on its first half results, the analysts argue there’s more upside in either battered FirstRand or Nedbank.
“You can’t just change the rules…” Neil Brown