Banking stocks are trading at massive discounts and are offering historically high dividend yields, analysts say.
The market appeared overly pessimistic about the effect that the downturn in SA would have on banks’ asset quality, said Jaap Meijer, MD of research at Arqaam Capital. "Valuations of most of SA’s banking stocks imply structurally higher bad-loan charges than our [full-year 2017 estimates] or [through-the-cycle] credit-cost estimates."
South Africa’s sovereign credit downgrades, weak economic growth and political uncertainty still weighed on banking shares, with the JSE banks index down 6% in 2017, even as the all-share index is nearly 8% higher.
The banks index is 8% weaker since President Jacob Zuma abruptly recalled former finance minister, Pravin Gordhan, from an international investor road show — a move that culminated in Gordhan’s dismissal in a late-night cabinet reshuffle.
Emerging markets investment bank Arqaam Capital, however, rates Barclays Africa, Capitec, Nedbank and Standard Bank a buy — targeting share prices at about 20% higher than their respective closing prices on Monday. It rates FirstRand a hold, even as the consensus view is to buy the stock, saying the bank is unlikely to deliver above-average earnings per share growth.
Arqaam says valuations factor in a higher cost of equity for most banks, providing a cushion if bond yields were to weaken from current levels.
A weak economy had not yet translated into materially higher bad debt among banks due to much slower credit growth in the current cycle, said Renier de Bruyn, an investment analyst at Sanlam Private Wealth.
"In contrast to the period following 2008, when bank dividends were cut as a result of higher bad debt, we expect banks to at least maintain dividend levels over the next few years," he said. This was due to stronger balance sheets and better-than-expected bad-debt charges, De Bruyn said.
Share-price weakness among banks is reflected in attractive dividend yields, which are nearing 30-year highs in the case of Standard Bank and Barclays Africa. The dividend yield reflects the dividend payout as a percentage of the share price.
"We have maintained a slight overweight position in South African banks, but have not added [to our position] since early 2016," De Bruyn said.
Andrew Vintcent, portfolio manager at ClucasGray Asset Management, said balance-sheet provisions for impairments were high by historical standards, while impairment charges, which remained elevated, could subside.
"There are legitimate concerns over banks’ ability to grow earnings in the short term, given weak loan growth and [the weak economy]. However, bank earnings tend to be resilient, and we would expect earnings to grow in the medium term. Coupled with valuations that are at multidecade lows, the investment case for the sector stacks up well."
Harry Botha, an analyst at Avior Capital Markets, was less optimistic, however, saying that the banks’ share prices were close to fair value.
"The political environment introduces risks that are tough to quantify [and which] can have a material effect on banks’ valuations because of the possibility of asset-price shocks."
Botha cited as an example a slide in house prices because of changes to land rights.
"Although we do not forecast this type of a doomsday outlook, it cannot be ignored. In our valuations, it is considered by applying a higher cost of equity for banks’ South African operations," he said.
"Standard Bank and Barclays Africa have the lowest exposure to South Africa and we prefer these banks to Nedbank and FirstRand."
Barclays Africa was trading at a massive discount to historic levels and therefore offered the biggest margin of safety among bank shares, followed by Nedbank, said Adrian Cloete, portfolio manager at PSG Wealth. Share prices of Standard Bank and FirstRand held up better than those of peers, he said.
On a price-to-earnings basis, the banks index is trading at a discount of almost 50% to the all-share index.
The market appeared overly pessimistic about the effect that the downturn in SA would have on banks’ asset quality, said Jaap Meijer, MD of research at Arqaam Capital. "Valuations of most of SA’s banking stocks imply structurally higher bad-loan charges than our [full-year 2017 estimates] or [through-the-cycle] credit-cost estimates."
South Africa’s sovereign credit downgrades, weak economic growth and political uncertainty still weighed on banking shares, with the JSE banks index down 6% in 2017, even as the all-share index is nearly 8% higher.
The banks index is 8% weaker since President Jacob Zuma abruptly recalled former finance minister, Pravin Gordhan, from an international investor road show — a move that culminated in Gordhan’s dismissal in a late-night cabinet reshuffle.
Emerging markets investment bank Arqaam Capital, however, rates Barclays Africa, Capitec, Nedbank and Standard Bank a buy — targeting share prices at about 20% higher than their respective closing prices on Monday. It rates FirstRand a hold, even as the consensus view is to buy the stock, saying the bank is unlikely to deliver above-average earnings per share growth.
Arqaam says valuations factor in a higher cost of equity for most banks, providing a cushion if bond yields were to weaken from current levels.
A weak economy had not yet translated into materially higher bad debt among banks due to much slower credit growth in the current cycle, said Renier de Bruyn, an investment analyst at Sanlam Private Wealth.
"In contrast to the period following 2008, when bank dividends were cut as a result of higher bad debt, we expect banks to at least maintain dividend levels over the next few years," he said. This was due to stronger balance sheets and better-than-expected bad-debt charges, De Bruyn said.
Share-price weakness among banks is reflected in attractive dividend yields, which are nearing 30-year highs in the case of Standard Bank and Barclays Africa. The dividend yield reflects the dividend payout as a percentage of the share price.
"We have maintained a slight overweight position in South African banks, but have not added [to our position] since early 2016," De Bruyn said.
Andrew Vintcent, portfolio manager at ClucasGray Asset Management, said balance-sheet provisions for impairments were high by historical standards, while impairment charges, which remained elevated, could subside.
"There are legitimate concerns over banks’ ability to grow earnings in the short term, given weak loan growth and [the weak economy]. However, bank earnings tend to be resilient, and we would expect earnings to grow in the medium term. Coupled with valuations that are at multidecade lows, the investment case for the sector stacks up well."
Harry Botha, an analyst at Avior Capital Markets, was less optimistic, however, saying that the banks’ share prices were close to fair value.
"The political environment introduces risks that are tough to quantify [and which] can have a material effect on banks’ valuations because of the possibility of asset-price shocks."
Botha cited as an example a slide in house prices because of changes to land rights.
"Although we do not forecast this type of a doomsday outlook, it cannot be ignored. In our valuations, it is considered by applying a higher cost of equity for banks’ South African operations," he said.
"Standard Bank and Barclays Africa have the lowest exposure to South Africa and we prefer these banks to Nedbank and FirstRand."
Barclays Africa was trading at a massive discount to historic levels and therefore offered the biggest margin of safety among bank shares, followed by Nedbank, said Adrian Cloete, portfolio manager at PSG Wealth. Share prices of Standard Bank and FirstRand held up better than those of peers, he said.
On a price-to-earnings basis, the banks index is trading at a discount of almost 50% to the all-share index.
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