R111.7bn is wiped off banking stocks

Investors worry about fiscal integrity

THE NEWS of the axing of Finance Minister Nhlanhla Nene knocked JSE banking, insurance and financial stocks yesterday, as investors were concerned about whether the fiscal discipline Nene had enforced in his tenure would be maintained.

The banking index on the JSE slumped by 13.52 percent.

The six banks in the index had a combined R111.72 billion of their market capitalisation wiped off.

FirstRand, Africa’s largest bank by market value, tumbled to end down by 14.84 percent to R38.79, while Standard Bank, the biggest bank by assets, fell 13.54 percent to R105.80.

Barclays Africa dropped 14.52 percent to end at R131.79 and Nedbank retreated 10.55 percent to R179.37.

“All the banks are built on confidence – removing the finance minister isn’t good for the country’s confidence,” said Patrice Rassou, the head of equities at Sanlam Investment Management. Nene’s firing caused the rand to collapse to an all-time low of R15.3857 against the US dollar.

Bond yields have also spiked, with the yield on the R186 at 9.5 percent, from its close of 8.71 percent yesterday, as the market worried about incoming Finance Minister David van Rooyen.

Investors are concerned about the perceived lack of clarity about his policy direction, little market knowledge about him and worries over future fiscal consolidation.

Other financial services companies also felt the impact, with Johannesburg’s benchmark life assurance index down 9.09 percent. Sanlam, the largest South African-based life assurer, plunged 10.66 percent.

Old Mutual, which relies on South Africa for more than half its profit, slid as much as 7.57 percent, the most in more than a month.

Matt Brenzel, the joint chief investment officer at Cadiz Investment Managers, said the risk rate had gone up on the announcement and had impacted long-term yields.

He said with a drop in the currency, imported goods prices move up and there was a very serious chance that the consumer would face higher imported prices as well the fact that the cost of debt would rise, placing consumers under more pressure.

Jean Pierre Verster, a 36One Investment Manager’s equity analyst, said the market showed serious concerns about the microeconomic environment, especially fiscal discipline and whether it would be maintained.

“They are concerned about the deteriorating national account, weak currency, higher inflation and higher interest rates which is not good for banks because it increases funding costs and puts pressure on customers’ disposable income.”

Banking Association of South Africa’s managing director Cas Coovadia said the markets had reacted negatively to this move.

“Our country, and international investors, need a degree of certainty that Minister Nene’s policy trajectory and actions will continue,” Coovadia said.

Investors might be concerned that the risk of increased impairments for bad debt was increasing, said David Shapiro, a director at Sasfin Securities.

“Are the banks lending to an economy that perhaps can’t handle it?” he said. “You’d expect rising debt levels as inflation surges.”

The sell-off in banks could be a sign that foreign investors are pulling funds out of the South African market, Shapiro said. “They are being used as punching bags. The banks are the ones lending to the manufacturers and miners,” he said.

Investec fell as much as 3.58 percent, while Capitec Bank, which provides unsecured loans, dropped 10.84 percent to end at R510.

The shock move came less than a week after credit rating companies pushed the nation closer to junk status, citing concerns over a sluggish economy and rising debt as inflation and interest rates climb.

“A debt downgrade would also lead to increasing funding costs which is not good for banks, corporate South Africa and the man on the street who is already over indebted,” Sanlam’s Rassou said. – Additional reporting by Bloomberg