Don’t bank on a quick recovery
But which share to buy?
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