South Africa’s “big four” commercial banks are expected to post earnings rises of between 15% and 16% in both 2003 and 2004, a forecast performance that is beginning to be discounted in their share prices, according to Old Mutual Asset Managers (OMAM).
Speaking at a media presentation on Tuesday OMAM banking analyst Simon Tippet said that current market sentiment toward the local banking sector was quite mixed due to the looming Financial Services Charter and the increasing weight of regulations and other negative factors.
Yet banking stocks had outperformed relative to the overall financial services index (the Findi) in the past year, with banks’ price-earnings ratios relative to the Findi rising from around 1,15 in the first quarter of 2002 to a current level of 1,48.
“Banking stocks have rebounded nicely, re-rating compared to the rest of the market, thanks to the nice, stable conditions over the past six months,” he explained.
“The rand has been appreciating, interest rates stable and inflation coming down, while banks have been able to maintain their margins at quite wide levels. And although credit growth has been relatively slow at between 8-10%, there has been no deterioration in bad debt levels. Liquidations and insolvencies are declining. This shows the consumer is healthy, and as long as interest rates do not stay too high for too long, conditions are likely to remain favorable for banks.”
The “big four” banks, comprising Absa (ASA), Standard Bank (SBK), FirstRand (FSR) and Nedcor (NED), had benefited from the demise of the local mid-tier banks, attracting deposits as investors were lured by the stability and soundness offered by their large size.
He added that offshore investors, originally scared off by the potential impact of the Financial Services Charter on bank earnings, were reporting that they were no longer concerned.
International investors hold between 12% and 15% of South African banks’ shares, with Standard Bank being the most exposed to poor international conditions of the big four due to its sizable London operations and Absa the least exposed.
Looking ahead, Tippet said that although interest rates were likely to fall over the next 12-18 months, which would erode banks’ margins somewhat, continued steady economic growth in South Africa of around 3% boded well for banks’ growth prospects.
“There is no big growth story ahead for them,” he acknowledged. “Banking shares will remain defensive stocks bolstered by plodding growth. And the value range between the four has narrowed in the past year to less than 20%, as the outlook for all is now very similar.”
He believed Nedcor had the most potential to surprise on either the upside or downside, depending on how well it is able to integrate and capitalise on the integration of the various BoE and NIB businesses, while Investec (INP), with its substantial international exposure, had to weather the storms of the international markets before it could re-rate substantially.
Banks’ historic price-earnings ratios were currently sitting at around 8, a level Tippet described as “very, very cheap both in absolute and historical terms”.
OMAM’s top banking share pick was currently FirstRand, with Absa rated the lowest, although there was little difference between all four, he concluded. – I-Net Bridge