Investec Group: Deposit Base and Book Value Do Not Reflect Medium-Term Targets

2019 Elections - Part 4. South Africa: Ramaphosa - ANC’s Magician?

2019 Elections - Part 3. India: Modi’s Magic Touch Fades as Populism Re-Appears

2019 Elections - Part 2. Indonesia: Jokowi’s Policies - Magic Bullet or Bitter Pill?

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Thematic (Sector/Industry)

South africa Financials / Thematic (Sector/Industry)

Africa has been described as the "final frontier". Regarding financial services, the adoption of new technologies is progressing fast in young underbanked populations. And the market is huge- almost the size of India or China. It is here that there is greatest potential returns and the greatest risk- from climate change, terrorism etc. Zimbabwe is a case in point: high risk but highly profitable.South Africa is a regional hub, not just for manufacturing but for financial services.  The top banks with broadly similar business models have ample exposure to high-risk high-return markets outside their home base. Just as say, though to a lesser scale, the Colombian banks tap into opportunities in Central America.The South African system has weather the C-19 storm better than many foretold and remains resilient and open to external financing. Impaired Loans hover around 5% which seems a fair reflection of the Asset Quality of the system unlike elsewhere. Liquidity and Capitalisation (helped by dividend restrictions) are on an upward trend though lower interest rates have exerted a negative pull on NIM/Spread and Profitability (despite Cost of Funds reduction) as LLPs have risen fast and top-lines have flatlined. This has affected Efficiency ratios. Writeback of provisions has yet to materialise in contrast to other markets. This means that the PH Score has eroded. The deterioration in value-quality trends though has been more than offset by the commodity tailwind which has underpinned South African bank shares. There are similarities again with Brazil.Despite their exposure to regional markets, South African banks remain mainly a narrative around the Sovereign. They hold a lot of government debt. Credit risk is more pronounced in the Sovereign than the banks. Low growth, high unemployment, C-19 and its impact on tourism and mining, and a dysfunctional energy market remain huge challenges. But the top banks adopt quality risk management policies in the face of potential and real defaults in areas such as car loans, consumer finance, and SMEs.With the top banks, as has been mentioned there are great similarities in business model, though there are nuances and slight differences of identity and focus. Standard Bank Group is partially owned by ICBC and thus has more of a Chinese connection.  Nedbank has a concentration in CRE which has as yet not revealed stresses from C-19. FirstRand has its merchant bank. Absa, Standard, Nedbank, and FirstRand all share a pan-African focus. Capitec is somewhat different structurally though with a mass market proposition, more susceptible to labour statistics, though lower income inhabitants tend to be better clients than many think.South African bank shares have had a good run of late. They have coped better than many thought, including this author. I underestimated the impact of higher commodities and extent of funding expansion (Liquidity injection) on the sector. Valuations are now of course higher. Once we get higher PH Scores, I will be somewhat more confident.  That could be around the corner in some cases with writebacks of provisions at some stage. But the market remains quite highly rated. For a reason: top South African banks (again like Brazil) know their onions.  Regarding recent trading history, momentum is not bad though the reflation story has taken a few knocks of late and shares have run out of steam.

Africa has been described as the "final frontier". Regarding financial services, the adoption of new technologies is progressing fast in young underbanked populations. And the market is huge- almost the size of India or China. It is here that there is greatest potential returns and the greatest risk- from climate change, terrorism etc. Zimbabwe is a case in point: high risk but highly profitable.South Africa is a regional hub, not just for manufacturing but for financial services.  The top banks with broadly similar business models have ample exposure to high-risk high-return markets outside their home base. Just as say, though to a lesser scale, the Colombian banks tap into opportunities in Central America.The South African system has weather the C-19 storm better than many foretold and remains resilient and open to external financing. Impaired Loans hover around 5% which seems a fair reflection of the Asset Quality of the system unlike elsewhere. Liquidity and Capitalisation (helped by dividend restrictions) are on an upward trend though lower interest rates have exerted a negative pull on NIM/Spread and Profitability (despite Cost of Funds reduction) as LLPs have risen fast and top-lines have flatlined. This has affected Efficiency ratios. Writeback of provisions has yet to materialise in contrast to other markets. This means that the PH Score has eroded. The deterioration in value-quality trends though has been more than offset by the commodity tailwind which has underpinned South African bank shares. There are similarities again with Brazil.Despite their exposure to regional markets, South African banks remain mainly a narrative around the Sovereign. They hold a lot of government debt. Credit risk is more pronounced in the Sovereign than the banks. Low growth, high unemployment, C-19 and its impact on tourism and mining, and a dysfunctional energy market remain huge challenges. But the top banks adopt quality risk management policies in the face of potential and real defaults in areas such as car loans, consumer finance, and SMEs.With the top banks, as has been mentioned there are great similarities in business model, though there are nuances and slight differences of identity and focus. Standard Bank Group is partially owned by ICBC and thus has more of a Chinese connection.  Nedbank has a concentration in CRE which has as yet not revealed stresses from C-19. FirstRand has its merchant bank. Absa, Standard, Nedbank, and FirstRand all share a pan-African focus. Capitec is somewhat different structurally though with a mass market proposition, more susceptible to labour statistics, though lower income inhabitants tend to be better clients than many think.South African bank shares have had a good run of late. They have coped better than many thought, including this author. I underestimated the impact of higher commodities and extent of funding expansion (Liquidity injection) on the sector. Valuations are now of course higher. Once we get higher PH Scores, I will be somewhat more confident.  That could be around the corner in some cases with writebacks of provisions at some stage. But the market remains quite highly rated. For a reason: top South African banks (again like Brazil) know their onions.  Regarding recent trading history, momentum is not bad though the reflation story has taken a few knocks of late and shares have run out of steam.

South African Banks: Opportunities and Risks