FILE PHOTO: Customers queue to draw money from an ATM outside a branch of South Africa's Nedbank and First National Bank (FNB) at a mall in Midrand outside Johannesburg.
Bank share prices have risen sharply this month, a turnaround from a steady decline since January after the prices were battered by economic factors such as high inflation, low growth, load shedding and geopolitical risks, analysts said Friday.
Since May 30, Standard Bank’s share price had risen 11.7% by Friday, Absa’s share price was up by 6.6%, Nedbank’s by 7.5%,
FirstRand shares grew by 16.9%, Investec by 9.2%, while Capitec’s share price was up 3.7%.
The JSE’s All Share Index increased 2.8% from May 30 to Friday.
The rise in bank shares started days after interest rates were lifted by 50 basis points.
Banks benefit from higher interest rates by taking advantage of the greater spread between the interest they pay to customers and profits they earn by investing. In South Africa, however, consumers face financial challenges such as high interest rates and inflation and salary increases that have not kept pace with inflation, and the consequent credit losses affect bank profits.
Gryphon Asset Management portfolio manager Kasparus Treurnicht, said these factors had forced consumers to spend what little disposable income they had left on non-discretionary items such as food, and taking out higher credit to buy other goods.
He said while inflation might have peaked, it remained high, and there were signs already, such as Capitec’s recently stated intention to push up credit provisions, that more of these loans would go bad.
African Bank last week reported a R44 million net loss as it had to make increased credit loan provisions, even though it still holds substantial capital reserves.
Anchor Capital’s CEO, Peter Armitage, said, however, the major banks were soundly profitable at this stage, and since their shares prices had risen recently in line with the general market and the prices had been so undervalued over the past year, they had reached a point where value investors saw an opportunity in buying their shares.
Morningstar Investment Management SA senior portfolio manager Sean Neethling, said the big four banks Standard, Absa, Nedbank and FirstRand, were being steadied by the strong balance sheets of their large corporate clients.
He said banks had, to a small extent, begun to pull back their appetite to lend where they perceived pockets of risk. He said going forward, financially distressed consumers and some companies in the small and medium sized business sector that typically had less capital reserves, may also be a risk area for banks.
“The main risk to SA banks is the contagion of an exaggerated and sustained period of global investor risk aversion where a loss of confidence in the banking system spills over into emerging markets,” he said.
And while some banks in the US and Europe had struck financial difficulties this year, SA’s banks held strong balance sheets that exceeded regulatory capital provisions.
“Local banks are well-capitalised and have been relatively prudent in terms of managing risk-weighted asset exposure, as well as the composition and maturity of their deposit and lending books.
“The global economy is going through one of the fastest interest rate hiking cycles in history as more than a decade of easy money has come to an end. This has contributed to a highly uncertain market environment characterised by extreme bouts of volatility as investors reprice assets and demand higher returns on capital... government balance sheets are at excessively leveraged levels,” he said.
“The trends suggest that the domestic banking sector has not experienced any meaningful squeeze on either deposit or lending growth,” he said.
Another positive development was the South African Reserve Bank’s proposed deposit insurance scheme to improve the ability of the banking system to manage shocks. Lending trends had been maintained at relatively stable levels over 10 years, he said.
“The investment thesis for SA banks remains especially compelling, where the combination of strong balance sheets and cheap valuations provide investors with an attractive entry point for generating solid long-term returns,” said Neethling.
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