Too con­ser­va­tive

Or will a more cau­tious strat­egy pay off in tough times?

Finweek English Edition - - Companies & Markets - BRUCE WHIT­FIELD brucew@fin­week.co.za

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

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