Bank rally 'to end soon'

Johannesburg - Banks have outdone the market since they rebounded from their 12-month lows on March 4, yet experts have all but written off the sustainability of this rally.

Nedbank has been the pick of the big four, returning 78% (excluding dividends), while Absa (66%), FirstRand (61%) and Standard Bank (61%) outperformed the 53% growth posted by the JSE top 40. Investment banking group Investec bounced back 113%.

However, Credit Suisse Standard Securities described the sector as being "relatively expensive". The firm said: "Our view is that the sector rating is likely to remain at broadly similar levels."

Analysts at stockbrokerage Imara SP Reid concurred, advising clients their exposure to the sector should be "light rather than meaningful".

Banks face numerous challenges, including a growing pool of bad debt, an increasingly competitive landscape of savings products and consumers' reduced appetite for credit.

'Bad' bad debts

The big four reported collective bad debts worth R30bn in 2009.

"This is no small sum, compared with the banking profit pool of R40bn, and larger than the total amount that went 'bad' in the three years from 2004 to 2006," said Allan Gray analyst Jacques Plaut.

This is not the big players' only headache. Plaut points out that large banks have traditionally relied on a base of lazy depositors who have provided a cheap and accessible source of financing over the years. This is now under threat.

For instance, low-cost banking group Capitec has grown its customer base to 2.1 million in only seven years by offering cheap services and appealing savings products. According to its interim results to end-August, Capitec has increased its deposit base from R3.3bn to R4.7bn, with R800m in the form of fixed deposits.

Dual-listed Investec has also worked hard to grow its retail deposit base in South Africa. In February the company had about £2.8bn in retail deposits in SA alone - up from the £2.2bn reported in March 2008. This figure is expected to grow further.

Sanlam Personal Finance (SPF) also increased its deposit holdings to about R3.4bn, up from the R2.2bn reported in 2008.

Few nibbles for debt

A third factor contributing to the lack of enthusiasm for the sector is a continued slowdown in lending and credit advances.

While banks have managed to grow their loan books by an annual average of around 12% over the last five years, consumers' appetite for debt appears to be at an end - the result of a combination of stricter credit extension legislation, high levels of existing debt and job insecurity.

- Fin24.com

*The writer holds shares in Standard Bank, Absa and Capitec