Banks: 'Expect higher bad debts'

Johannesburg - When Standard Bank, Nedbank and FirstRand report in the next two weeks, shareholders can expect a big increase in bad debts.

This is the view of Tracy Brodziak, a portfolio manager at Old Mutual Investment Group SA (Omigsa) "Expect significant increase in bad debts but loan growth to remain solid."

Investors may take some clues from the performance of Imperial Bank which on Thursday reported a 26% increase in loans and advances.

Nilan Morar, the head of trading at Global Trader, told Fin24.com that he expects some volatility around the banking stocks ahead of their results announcements.

He said: "In terms of earnings, it is difficult to read as the general environment remains bearish," adding that "traders are looking at banks with a very short-term trading mindset and benefiting from trading the volatility ".

Morar points to US banking giants Citigroup and Bank of America which have been "under pressure" in the last few months as sentiment toward financial services firms turned negative. As a result, some of the local banking stocks have taken heat - "traders are looking at the sectors globally rather than individual counters."

Sasha Naryshkine of asset manager Vestact points out local banks have outperformed their peers. He said: "The local banking index has far outperformed the Morgan Stanley Capital Indices (MSCI) emerging market banking index, which I guess speaks for itself. So the questions then to ask is why the bearishness on the local banks?"

A big concern for investors has been the quality of the bad debts or "non-performing loans" (NPLs) on the books of the banks.

Naryshkine said that the recent and expected further interest rate cuts might see the size of provisions rise and take a while to "unwind while lenders try and makeup ground".

He said: "Remember that an NPL is not a death knell but rather a temporary time-out; not all loans that are non-performing are unrecoverable."

Stephen Meintjes, who heads up research for stockbrokerage Imara SP Reid, says he will be focusing on the retail operations of these banks where he suspects other banks may have been slightly more "lax" than at Absa who reported earlier this month.

Meintjes also said he would be interested to see whether or not Standard Bank would continue with its plans to expand into Africa or would scale back and consolidate operations locally.

Strong performance from investment banking divisions has helped banks in 2008, despite the slowdown and problems in the consumer credit market. Absa Capital in particular was able to boost the Absa Group's performance. Meintjes said: "It will be interesting to see whether or not Absa Capital took business from other investment bankers.

Omigsa's Brodziak said the key aspect to look out for was the banks' expectations for full-year 2009 and beyond. She expected that this would be pretty gloomy given the state of SA and world economy. However, Omigsa feels that this has already been discounted from prices.

In terms of preferences in the sector she said: "We prefer Standard Bank just in terms of valuations and it has underperformed the others over last few months."

by 12:30 on Friday, Standard Bank had fallen 7.2% (476c) to 6 174c, FirstRand was down 6.3% (80c) to 1 180c and Nedbank was down 5.6% (456c) to 7 746c.

- Fin24.com