African growth without the premium
From the meteoric rise of Capitec and t he Michael Jordaaninspired resurgence of FNB, down to the woes of African Bank Investments Limited (Abil), the South African banking sector has certainly been in the headlines of late.
The days of Standard Bank, Africa’s largest bank by assets and earnings, being the poster child of the African growth story are but a distant memory. Its position has been usurped by the likes of retail giant Shoprite and brewer SABMiller. Since Industrial and Commercial Bank of China (ICBC) acquired a 20% stake in Standard Bank in 2008 (at R136 per share), the bank has suffered a series of missteps. Its overambitious growth forays into emerging markets including Russia, Turkey and various South American countries were recently disposed of or scaled down. Perhaps anecdotally, the most visible sign of the excesses are the swanky new premises recently opened in Rosebank (commissioned back in the heady days of the early 2000s).
The juicy profits up for grabs in Africa have proved hard to come by, despite the bank investing significant time and capital into this expansion.
The team at Lentus Asset Management is always wary of investing in great stories. Experience has shown that an exciting and comfortable story is usually attached to a company whose share price has already factored this in. Thus the ‘ logical’ investment thesis doesn’t always lead to superior returns. It is thus unsurprising that Standard Bank was not of interest to us leading into the financial crisis of 2008 when the story was top of mind with the African ‘ bulls’. Investors were so convinced of this story that they were willing to pay over 3.5 times book value for this business – a historical high. Unsurprisingly, the share price delivered very little for shareholders over the following six years, leaving many investors very disappointed.
However, back on the ground, the bank has continued to grow its African business and book of assets, despite the abovementioned setbacks in other markets. The disposals have sl i mmed it down to a more focused unit. The capital invested into its African network is f inally starting to deliver profits across Africa (outside of SA) now contributes nearly 25% of group earnings. Largest African markets include Nigeria, Mozambique and Namibia. The bank has 621 branches in SA and over 500 in the rest of Africa. The bank is well placed to benefit from increased China/Africa trade via their strategic relationship with Industrial and ICBC, which bought a 20% equity stake in 2008. the 18 countries that it operates in. There has not been a fundamental change in the underlying business (banking remains a very profitable endeavour), but market sentiment is such that the valuation is now significantly more attractive.
As it is now trading at just 1.5 times book value, investor expectations for Standard Bank have clearly normalised and in our view are now understating likely future returns. In a local market with few attractively priced opportunities, Standard Bank at current levels offers the opportunity to buy a quality business at a reasonable price.
Nic Norman- Smith