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Hard times over for SA's major banks

Mar 11 2012 15:31
Niel Joubert

Company Data


Last traded 241
Change -3
% Change -1
Cumulative volume 325679
Market cap 0

Last Updated: 20-02-2017 at 02:34. Prices are delayed by 15 minutes. Source: McGregor BFA


Last traded 144
Change -3
% Change -2
Cumulative volume 1956067
Market cap 0

Last Updated: 20-02-2017 at 02:34. Prices are delayed by 15 minutes. Source: McGregor BFA


Last traded 51
Change -1
% Change -1
Cumulative volume 3886371
Market cap 0

Last Updated: 20-02-2017 at 02:34. Prices are delayed by 15 minutes. Source: McGregor BFA

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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 banking shares.

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 these highs.

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 debts.

“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 lesser extent.

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 greater earnings.

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 the microscope.

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.

 - Sake24

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