Standard Bank Group definitely fairly priced, but a better rating is possible |

LIBERTY Holding was mauled by the Covid19 pandemic in 2020 and 2021 and so was its parent, Standard Bank Group. Standard also recently made an offer to the minorities to acquire their shares. Is the offer fair and is Standard Bank Group fairly priced?

Liberty’s market capitalisation (number of issued shares multiplied by the share price in rand) tracked the “group equity value” report published in Liberty’s financial statements that reflects the combined value of the various components of Liberty’s businesses.

Liberty’s long-term insurance entities and related asset holding entities are valued by using the embedded value methodology which effectively is the present value of future profits plus the company’s capital and surplus.

Liberty’s equity value excluding non-controlling interest over the past three years was about R8 billion higher than the shareholders’ interest attributable to ordinary shareholders.

The impact of the pandemic on investor sentiment resulted in Liberty’s market capitalisation falling even below the shareholders’ interest of R21bn and remained there until Standard Bank, with a 54 percent stake in Liberty, decided to make an offer to minority shareholders.

The announcement saw the gap between Liberty’s market capitalisation and group equity value excluding non-controlling interest closing to less than R3bn from about R13bn previously.

The offer by Standard is R25.5 per Liberty’s share plus half a Standard Bank share for each Libertys share held. The offer is fair as it equates to a “group equity value” of about R28bn as was reported at the end of the 2020 financial year.

Liberty’s woes also had a significant impact on investor sentiment in regard to its parent. Standard Bank Group’s rating as measured by its ratio of market capitalisation to shareholders’ interest attributable to ordinary shareholders has been in a downtrend compared to the rest of the major banks collectively.

The downtrend in Standard’s rating unequivocally gained momentum with the worsening situation at Liberty due to the latter’s exposure to the coronavirus and difficulties in Africa. After bottoming in May last year, the group’s rating increased to 1.3 from 0.96 while

Nedgroup moved to 0.97 from 0.57, Absa to 1.14 from 0.65, Firstrand to 3.33 from 2.31 and Capitec to 7.31 from 3.82.

Standard lagged the other banks on the upside. It was on the right track until 2019. The return on equity ratio (ROE) improved steadily to 21.5 from 15.3 percent in 2016, boosted by personal and business banking and underscored by Liberty.

Over the same period, credit losses in the group’s banking activities were reduced while the cost-to-income ratio remained steady at about 56 percent.

The big question is whether Standard is treated fairly by Mr Market. In my opinion, ROE and cost-to-income are the two of the most important ratios that should determine its ratings as measured by the ratio of market cap-to-ordinary shareholders’ interest.

It is not worthwhile to use the financial results for companies for periods after February last year due to the Covid impact. For comparative purposes I used the average ROE and cost-to-income ratios from 2016 to 2019.

I used Friday’s closing prices and the most recent published financial results to calculate the market cap-to-ordinary shareholders’ interest ratios or ratings.

My analysis points to strong linear relationships between the ratings and ROE and cost-to-income ratios.

It is evident that Standard’s rating is in line with the underlying fundamental ratios. Therefore, as things stand, the share’s rating will only improve significantly if the group manages to improve ROE and/or slash its cost-to-income ratios relative to the other major banks.

Shifts in the curves, up or down, due to an overall re-rating or de-rating of South African bank shares will also have a material impact on Standard Bank Group’s rating.

The group recently unveiled a new growth blueprint, moving to a platform through a banking app for other products and services available that complement its own as well as everything from furniture to plumbing services.

The proof of the pudding is in the eating, though. A better rating relative to the other bank shares is dependent on how the growth blueprint delivers in the long run.

Standard Bank Group is fairly priced. I do expect a better rating but only on the back of Mr Market smiling on South African bank shares.

Ryk de Klerk is analyst-at-large. Contact rdek@iafrica.com. He is not a registered financial adviser and his views expressed above are his own. He has a direct interest in Standard Bank Holdings. You should consult your broker and/ or investment adviser for advice. Past performance is no guarantee of future results.