Gordhan moves knock R60bn off banking stocks
It’s déjà vu as National Prosecuting Authority’s manoeuvres against minister wipes out value
IN A reaction similar to that when Nhlanhla Nene was sacked as finance minister last December, almost R60-billion was wiped off the value of banking stocks this week when the National Prosecuting Authority announced it planned to charge Finance Minister Pravin Gordhan with fraud.
The JSE Africa Banks index slumped 6% this week, taking about R59.6-billion off the market capitalisation of its six constituents, including FirstRand, Standard Bank and Nedbank.
The impact of the summons on the banking sector was not as severe as the shock when Nene was removed as finance minister on December 9 last year, which wiped out R145.2-billion in the value of banking shares.
This sector recovered, but the move against Gordhan brought the market value of the banks close to the level they were days before Nene was fired, hovering around R845-billion compared with R824-billion in December.
“Bank shares are so-called interest-rate-sensitive stocks on the JSE — meaning that banks’ performance is generally closely correlated to the macroeconomic environment,” Nedbank CEO Mike Brown said on Friday. “Bank valuations are essentially a function of the future returns the market expects banks to make and the cost of capital.”
Barclays Africa said CEO Maria Ramos was not in a position to comment. Standard Bank referred questions to a market commentator. Alan Pullinger, FirstRand deputy CEO, was not available to comment. FirstRand CEO Johan Burger is on leave.
Brown said investors would have seen the move on Gordhan as something that could significantly increase the chances of a sovereign credit rating downgrade in December.
South Africa was granted a stay of execution in June, when S&P Global Ratings opted to keep the country’s rating at the lowest investment grade with a negative outlook. Rival agency EVIL TIDINGS: News this week that Finance Minister Pravin Gordhan would be charged with fraud sent banking stocks tumbling Fitch Ratings affirmed its BBBrating, also on the lowest rung of the investment-grade ladder, but with a stable outlook.
Both agencies raised concern about political risk, which they said could threaten their ratings and lead to a downgrade.
S&P said it would keep an eye on cohesion in the executive branch of the government. It is expected to announce results of its ratings review in December.
Brown said the timing and nature of the summons against Gordhan, so soon before the delivery of the Treasury’s medium-term budget policy statement on October 26, and concerning essentially an internal HR matter, did not indicate any cohesion in government, and increased the chances of a downgrade.
NPA head Shaun Abrahams said this week the intention was to charge Gordhan with fraud for his role in approving a R1.1million early retirement penalty that the South African Revenue Service paid on behalf of Ivan Pillay, its former deputy commissioner, to the Government Employees Pension Fund.
This was done during Gordhan’s previous stint as finance minister. Pillay and former SARS commissioner Oupa Magashula have also been charged with fraud.
“Any . . . downgrade would negatively impact the outlook for the SA macroeconomic environment, as inevitably the rand would depreciate further than previously thought, inflation would increase, GDP growth would slow further and interest rates would rise faster,” said Brown.
This, he said, would bring consumer finances under pressure, leading to higher-than-forecast bad debts.
“In this environment as the probability of a downgrade increases, the market would assume that future returns in the banking sector would be lower than if a downgrade does not happen; and the cost of capital would be higher.
“Bank valuations fall when the higher probability of a downgrade causes these factors to be [put] into bank valuation models, and bank share prices therefore also fall.”
An analyst, who asked not to be named, said Gordhan should be allowed to continue trying to maintain South Africa’s current investment-grade rating.
“I wouldn’t want to see the market impact on the currency, bond yields, future funding costs for the government and [state-owned entities], and local share prices — including banks, retailers, property companies — if Minister Gordhan is not there to steer South Africa through this very challenging period ahead,” said the analyst.
“We really need him as a country.”
Bank valuations are essentially a function of the future returns the market expects We really need Minister Pravin Gordhan as a country