Banks reel as Zuma lands R80bn blow
As banks go, so goes economy, experts warn
HOLDERS of banking stocks are counting their losses following President Jacob Zuma’s sacking of Pravin Gordhan as finance minister in a cabinet shakeup that threatens to unravel any hope of economic recovery.
At least R80-billion has been wiped off the value of four major banks — FirstRand, Standard Bank, Barclays Africa and Nedbank — since last Thursday, when Zuma delivered on the long-speculated reshuffle.
The sharp retreat in banking and financial services shares on the JSE echoed the market’s response to the shock exit of Nhlanhla Nene from the finance ministry post in 2015.
The sell-off of bank shares was magnified by S&P Global Ratings’ decision to strip South Africa of its investment-grade status on a foreign currency basis following cabinet changes that have drawn stinging criticism from business, unions and civil society groups.
The share-price drops affect the value of workers’ provident and pension funds, which are invested in these companies.
An estimated 36% of local banks are foreign-owned, according to Citadel chief investment officer George Herman, making them vulnerable to a further sell-off if Fitch Ratings or Moody’s also lower South Africa’s credit rating.
The fortunes of the banks closely track those of the economy — which until recently had been predicted to improve.
With the effect of the recent drought now receding — bringing some relief to food prices — and the recent strength in the rand before it lost ground in the last two weeks in response to political upheavals, the economy had been set to improve from its multi-year low-growth trap.
Inflation also looked relatively contained, with some economists expecting a cut in interest rates in the second half of the year.
This would have boosted consumers’ disposable income and alleviated pressure on indebted consumers, such as those paying off mortgages.
But this optimistic scenario has been flipped on its head since Zuma shook investor and business confidence.
“Banks are tethered intrinsically to the prospects of an economy, so a weaker environment is a concern,” said Herman, whose company has R44.95-billion in assets under management.
“This is a worrying scenario and should result in lower bank earnings and significant strain in the sector.
“If this is the case, and loan origination becomes difficult, then the banks’ regulatory capital ratios begin to look poorer, risks build and this will lead to further downgrades in their own credit ratings.”
Underscoring the close relationship between banks and the local economy, the National Association of Automobile Manufacturers this week suspended its projections for new car sales this year until it had a better sense of where the economy may be headed in the coming months.
The unfolding political drama has dealt a blow to the rand, which will in turn inflate the cost of imported goods, such as vehicles. The local currency flirted with R14/$ this week, marking a sharp turnaround from two weeks ago when it seemed set to cross the R12.30/$ level, which marked the best level since 2015.
“For an economy that is not growing fast enough to support its population growth, I would be very worried if I was a bank shareholder,” said Casparus Treurnicht, a portfolio manager at Gryphon Asset Management.
“Banks get caught up in a spiral effect when considering the fact that lending and/or net interest margins will decrease and provisions need to be increased.
“More stringent lending criteria in itself puts a handbrake on the economy — just think of property sales, developments and related industries,” he said.
Zuma fired the first warning shot two weeks ago that a reshuffle in the cabinet was coming when he abruptly recalled Gordhan from an overseas investor trip before sacking him last Thursday.
S&P Global Ratings this week downgraded the foreign currency denominated debt of the major banks to align their ratings to that of the country, as is usual practice.
A credit downgrade to subinvestment grade, or so-called junk status, usually leads to a higher cost of borrowing and higher interest payments to compensate investors for the higher potential risk of defaults on loans repayments.
I would be very worried if I was a bank shareholder