Banking’s bulls still on the run

DESPITE poor economic conditions and political uncertainty, banking stocks rallied 35% over the past year and the momentum has carried through into the new year.

Although impressive, the banking sector’s performance came off a low base following “Nenegate”, the sacking of former finance minister Nhlanhla Nene by President Jacob Zuma in December 2015, which Harry Botha, an analyst at Avior Capital, said was the biggest contributing factor to the rally.

Adrian Cloete, a portfolio manager at PSG Wealth, said the performance of South Africa’s bond yield, which moved below 9% last year and has remained at those levels, was among the contributing factors.

“As the 10-year bond yield moves lower, some shorter-term market participants could start to use a lower-risk discount rate to value banking shares which results in higher implied valuations. We have seen some of this already in the rally of banking shares,” he said.

Botha said the assumption that there was going to be an economic recession could also have been a factor. However, a short-term recession would have had very little effect on banking stocks.

“Our big banks are pretty resilient — they’re a comfortable oligopoly and they can manage stability fairly well in the short term,” he said.

Leading the surprisingly strong performance was Standard Bank, whose share price grew 33%. The “Big Blue” increased its dividend by 12%, another factor that warmed investors to the bank.

“After its strong run last year, Standard Bank is probably more fairly valued now,” said Cloete.

However, Botha warns that the bank is “more exposed to Africa and a lot of those countries are struggling from a currency and economic growth perspective”.

The World Bank forecasts subSaharan African growth for the year at 2.9% as the region adjusts to lower commodity prices.

Capitec’s growth — its stock price having almost quadrupled over the past five years — does not appear to be slowing.

The lender’s share price grew 29% last year and Botha expects another strong performance this year despite continued consumer pressure.

“Capitec is expanding its transactional banking offering quite a bit . . . That is what is driving the stock price at the moment.”

At the lower end of the rally, the share price of Barclays Africa grew 17% last year despite the decision by the lender’s parent company to sell down its stake in the bank amid regulatory pressure. It remains unclear how Barclays plc plans to dispose of its stake but Nico Smuts, an analyst at 36ONE Asset Management, expects that “the majority of Barclays plc’s shares will be placed in the market to be taken up by institutional investors”.

Smuts said these potential placements were weighing on Barclays Africa’s valuation and the market could experience a relief rally once the shares have been placed.

FirstRand and Nedbank’s share prices grew by 25% and 26% respectively in 2016.

For FirstRand, which is planning on expanding into Africa, going into a low-growth environment is a risk, but, Smuts said, “considering what has transpired in Africa — especially in commodity-producing economies — this could be an opportune time for FirstRand to make further inroads into Africa”.

Nedbank is expecting better results this year from its African Bank subsidiary Ecobank, after the bank’s large losses in 2015 and last year.

Botha expects Nedbank shares to outperform the mid-teen growth of Standard Bank, Barclays Africa and FirstRand.

“They’re a bit more exposed to trends in South Africa and their businesses or franchises are performing really well.”