Johannesburg – After a couple of years of struggling South
Africa’s four big banks – Absa Group [JSE:ASA], Nedbank Group [JSE:NED],
Standard Bank Group [JSE:SBK] and FirstRand [JSE:FSR] – have again shown good
growth in earnings and the sector looks healthy.
The four big banks’ reporting season is just over and all
announced earnings growth exceeding 20%.
But this does not mean that investors should now rush to buy
Analysts say the increased earnings have largely been
discounted in the share prices. Big increases are therefore not expected for
the rest of the year.
During the past month the share prices all four reached
their highest levels in 12 months. Their shares are all still trading close to
FirstRand’s share price leads the pack and since the
beginning of the year had climbed 16.67%. Second comes Nedbank with a 12.92% rise, followed by Absa with 11.84%. Standard Bank’s share put on 9.87% in
the year to date.
The JSE’s bank index has risen 12.51% this year, and over the
past 12 months 19.4%. The index’s price to earnings multiple (P:E) is currently 12.27.
Absa is the only bank currently cheaper than the index with
a P:E of 11.63. The rest of the banks’ P:Es are above 12.
In an uncertain economic environment with muted demand for
credit, interest rates at their lowest levels ever, consumer indebtedness still
high and business confidence fairly low, the banks have looked to, inter alia,
cost control and growth in non-interest income to boost earnings.
All four banks have also tried to increase their market
share in the unsecured loans market.
The four have all announced a decline in bad debts, which
contributed to the earnings increase.
Johann Schultz, an analyst at Afrifocus Securities, said bad
debt is of a cyclical nature and one should therefore rather look at the banks'
profits before provisions – that is, the profit before making provision for bad
“This gives one a better idea of underlying growth in the
bank,” he said.
If this figure is used, all the banks achieved similar
growth – around 9%.
The banks had different approaches to loans and advances.
Standard Bank’s loans and advances were around 10% up and
home loans were 6% up.
Scholtz said Standard Bank adopted an aggressive strategy in
wanting to increase lending in the home loan market, as did FirstRand to a
Absa and Nedbank adopted a different approach and advanced
less to this market.
Scholtz however confirms that all four banks were more active
in the unsecured loans market.
Even though this forms a small part of the banks' loans
portfolio, it is an important market in which banks can expand and achieve
This market provides better risk-adjusted margins than
residential home loans, as well as higher yields on assets.
If the European debt crisis deepens in 2012, two major risks
could arise, said Scholtz.
First, banks' capital adequacy could increasingly come under
Second, slowing global growth could lead to higher
unemployment in South Africa.
Leap year bonanza
South African banks earned a total R271m in extra revenue
this year owing to the leap year.
Absa, African Bank Investments [JSE:ABL], FirstRand, Investec [JSE:INL],
Nedbank and Standard Bank earned this additional net interest income on
February 29, said Deloitte.
On that day Standard Bank and Absa, the two biggest banks,
respectively earned R79m and R67m in extra interest.
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