SA banks have 'hit a trough'

Johannesburg - Despite profit warnings from FirstRand and Absa and a downgrade from Deutsche Securities, analysts believe bank earnings have hit a trough.

"It would seem to us that earnings are under pressure now, but the chances are that the current reporting period will be the trough of the earnings cycle," said Clyde Rossouw, portfolio manager of the Investec Opportunity Fund on Tuesday.

While European and US banks have battled through the current economic cycle with many being bailed out by governments, the SA banking sector has held up well while maintaining high capital and solvency levels.

Also, despite the slowdown and an increase in bad debts, banks have continued to churn out profits and reward shareholders with dividends.

Rossouw said if this was the worst-case economic scenario, South African banks have "held up well".

Although bad debts have weighed on the performance of banks, particularly the retail side where consumers are under pressure, Rossouw said bad debts are "peaking or close to peaking".

One area he does caution on is the erosion of interest income on the back of lower interest rates. To date interest rates have dropped 450 basis points in the current rate-cutting cycle.

Rossouw's view is echoed by analysts at RMB Morgan Stanley.

Warning on lower earnings

"We now have more conviction that 2009 will be the trough in the earnings cycle, and recommend buying into weakness on a 12-month view," the analysts said in a research note.

RMB Morgan Stanley said Standard Bank and FirstRand are its preferred banking stocks.

Rossouw's comments come on the back of a series of earnings downgrades from Deutsche Securities, which pre-empted profit warnings out of FirstRand and Absa last week.

In its report, Deutsche downgraded Absa from "hold" to "sell", while changing its recommendation on Standard Bank and Nedbank to "hold" from "buy".

It retained its "buy" recommendation on FirstRand, but warned that earnings would be lower.

In its trading update last Wednesday, FirstRand warned earnings would be lower on the back of a weak performance from its investment banking group Rand Merchant Bank, as well as declining asset growth and more bad debts.

Rossouw said the key driver for banking earnings would be the underlying economic situation. He said banks were anticipating a weaker economic recovery than share prices reflected.

- Fin24.com

*The writer holds ordinary and preference shares in Standard Bank.