Don’t bank on a quick re­cov­ery

But which share to buy?

Finweek English Edition - - Companies & Markets - SHAUN HAR­RIS

WHILE THERE ARE no dead cer­tain­ties in the in­vest­ment world, two as­pects South African in­vestors can feel rea­son­ably con­fi­dent about are that our banks aren’t in dan­ger of de­fault, as has been seen over­seas, and that bank­ing shares are cheap. So do in­vestors buy banks now? From a value per­spec­tive the ob­vi­ous an­swer is yes. But re­cov­ery of bank share prices could take some time. And if an in­vestor isn’t go­ing into a fund or buy­ing all the banks, which should be first choice?

Stan­dard Bank has long been at the top of the list. Un­der CEO Jacko Ma­ree it’s be­come the bluest chip bank­ing share. But in­vestors’ per­cep­tions are start­ing to change a lit­tle. Most of the con­cern cen­tres on Stan­dard’s strong foray into de­vel­oped mar­kets. The strat­egy was good and ben­e­fits should con­tinue to flow once the global credit cri­sis is over. But Lon­don, for ex­am­ple – where Stan­dard Bank has a large op­er­a­tion – isn’t where in­vestors now want ex­po­sure.

Deutsche Se­cu­ri­ties in a re­cent re­port rated FirstRand as its top pick, with Absa the least pre­ferred. They also have a buy rec­om­men­da­tion on Ned­bank but have down­graded Stan­dard Bank from buy to hold.

But it’s not a peck­ing or­der. Deutsche’s view is based on slow­ing do­mes­tic and in­ter­na­tional GDP growth (do­mes­ti­cally from 4,5% to 2,8% for 2009; glob­ally from 3,4% to 1,2%) and what that will mean for SA’s banks. Es­ti­mated earn­ings have been cut and Stan­dard and Absa down­graded from buy to hold, on the ba­sis that both share prices are trad­ing at around a 10% dis­count to fair val­ues. So it’s a bit like a high base ef­fect and not di­rect crit­i­cism of the banks.

Deutsche doesn’t ex­pect to see much in the way of re­cov­ery be­fore 2010. “Al­though mo­men­tum in card and ve­hi­cle fi­nanc­ing is likely to be­gin im­prov­ing by early 2010, we ex­pect mort­gage credit to con­tinue to slow to 2% year-on-year growth by late 2010 on the back of a 12% nom­i­nal de­cline in house prices.”

Lat­est credit growth fig­ures show con­sumers un­der strain, which is likely to keep banks’ in­ter­est in­come growth muted. Stan­lib econ­o­mist Kevin Lings says growth in pri­vate sec­tor credit eased to 16,42% year-onyear in Septem­ber, from 18,64% in Au­gust. “In par­tic­u­lar, mort­gage credit is now grow­ing at only 16,6% year-on-year – well down from a re­cent peak of 30,9% year-on-year in Oc­to­ber 2006. Sim­i­larly, credit card growth has eased to an an­nual rate of only 6,8%, which is neg­a­tive in real terms. That com- pares with growth of well over 35% year-onyear through­out most of 2007.”

That’s go­ing to strap the banks and Lings says the big fo­cus now is on cost con­trol, such as freez­ing re­cruit­ment and staff cut backs.

Banks are also likely to look at in­creas­ing ser­vice fees, but those are very much un­der the pub­lic mi­cro­scope (as Fin­week of­ten writes about), so there will be re­sis­tance.

What’s the cat­a­lyst that could spark the re­cov­ery of banks’ earn­ings and ul­ti­mately share prices? Lings says the key fac­tor is some vi­tal­ity in the bank­ing sys­tem world­wide. “We need to see more con­fi­dence in the banks, some sta­bil­ity in the prop­erty mar­ket in the US and a re­sump­tion of in­ter­bank lend­ing.”

The sec­ond fac­tor is the cur­rent global risk aver­sion, he says, with for­eign in­vestors get­ting out of emerg­ing mar­kets. That’s cer­tainly a fac­tor for South African banks, which tend to have a fairly high reg­is­ter of for­eign share­hold­ers. Over the past few weeks for­eign in­vestors have been huge sell­ers of South African shares.

Per­haps in­vestors should sim­ply look at div­i­dend yields. Ned­bank is on the high­est (8,2%), and while per­for­mance is still much de­pen­dent on its cor­po­rate bank­ing unit, re­cov­ery has been sound un­der CEO Tom Board­man. FirstRand and Absa are on sim­i­lar yields. Stan­dard Bank, tra­di­tion­ally a good div­i­dend payer, is on the low­est yield at 5,7%.

Led the re­cov­ery. Tom Board­man

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