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On the face of it, one would think investors would pile into South Africa’s bank stocks after a year of healthy profits and growing loan books – but the sector, contending with weak economic prospects, has underperformed the JSE’s benchmark All Share Index (Alsi).
Since November 2021, the South African Reserve Bank (Sarb) has been fiercely fighting off stubborn inflation, delivering a combined 425 basis points increase in the repo rate. The consequent increase in interest rates has provided a fillip to banks’ top line earnings. But over the past 12 months, the eight-member banks index has weakened more than 10 percent, while the Alsi has outpaced the sector, climbing 13 percent over the same period.
Banking Index, JSE, SA Banks
Faced with an unrelenting energy crisis throttling economic growth, South Africa’s banks have landed in a “bad environment”, Kokkie Kooyman of Denker Capital tells Moneyweb.
Investors have become more wary of a rise in unemployment, consumer and corporate lending coming under pressure, and an increase in bad debts, he says.
“The banks themselves have actually been weak. (The) combination of inflation, and the most important thing is less electricity with load shedding, means that both the corporate and consumer sections are going to really battle.” -Bloomberg
With the rand’s plunge – it has bled more than 20 percent over the past year – souring sentiment toward the banking sector and fears the Sarb may continue raising rates to protect the currency, the JSE is helped by rand-sensitive stocks such as Naspers which generates a chunk if its earnings offshore.
“[Add] all the miners … [and] more than 70 percent of it [JSE] is offshore, and that would have helped,” says Kooyman.
While banks generally benefit from higher interest rates, investors are shrugging that off, with the negative factors top of mind.
“The banks are well reserved but there will be higher debt, [and] loan growth will be lower … I think they [investors] are just focusing on the negative,” says Kooyman.
Among its peers, Capitec, with a loan book mostly saturated in consumer lending and minute corporate exposure, has seen the steepest decline in its share price over a year. It is down 34,77 percent.
Capitec is also negatively impacted by being 100 percent exposed to South Africa at a time when investors are looking for companies with out-of-SA exposure to escape some of the negative fundamentals playing out in the country, says Kooyman.
Specialised lender Investec, with core operations in both South Africa and the UK, is experiencing the inverse of Capitec’s woes.
Its share price has managed to buck the trend, surging more than 22 percent over the past 12 months.
“Investec, because half its earnings and balance sheet is in London … has a direct benefit in its income statement and its balance sheet from a weakening rand and at the same time the UK [earnings] were actually better than expected,” says Kooyman.
Standard Bank, South Africa’s largest lender by assets, has lost over 6 percent over the same period, but investors aren’t too cautious here because of the bank’s ambitions to generate more of its income outside of South Africa.
“The share price had been very weak before this, because of the problems reported in Ghana and Kenya,” says Kooyman.
“Standard Bank just came off as sold off, and suddenly South Africa [started] looking worse; the market [was] saying … it’s actually going to be better off than the South African banks because of its African exposure.” Moneyweb
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