Johannesburg - Structural growth opportunities could in the next five to seven years contribute R5.7bn to R9.6bn to banks' earnings, reckons a research report by RMB Morgan Stanley banking analysts.

The analysts expect a significant repricing of the retail activities of the major commercial banks, in particular.

RMB Morgan Stanley recently conducted an in-depth investigation into South African banks and found that the picture was not as gloomy as some analysts thought.

Banking shares have been taking a breather in recent months after their strong run following record lows in March in the aftermath of the global financial crisis. Since then results have reflected sharply rising bad debts and weaker growth in advances.

Over 10 years the average earnings growth of the banks could have been up to 50% - even better than during the last bull market from 2004 to 2007.

The principal indicators are a growing economy, in which unemployment has fallen and households' debt-leveraging ability has improved considerably.

Standard Bank is the favourite bank. RMB Morgan Stanley points out that this banking group has the ideal combination of risk and spread of earnings. Standard has strong exposure to the investment banking sector, while its retail advances this year could produce strong growth of at least 15%.

Further positives are its efficient management and unique position in the African market, the report continues.

RMB Morgan Stanley also has a positive view on Nedbank, the bank that until recently had the poorest rating on the market.

Nedbank has improved its capital position, significantly alleviating fears about its capital adequacy. The discount to its competitors could narrow further, the report suggests.

On Monday Standard Bank was trading at a price/earnings (p:e) multiple of 11.9.

Nedbank is less highly rated at a p:e of 9.12. At Monday's trading price of R121 it could still climb to RMB Morgan Stanley's target of R133. The Nedbank share price has more than doubled since its R65 low in March.

Smaller banking shares are also drawing attention. Capitec is being recommended as a buy by both Nedgroup Securities and Credit Suisse Standard Securities, following its recent full-year results, which show strong earnings growth of 48%.

It is worth noting that smaller banks like Capitec are seeing strong growth in advances - even during a recession year. In addition, the ratio of write-offs has declined from 17.9% in the first half of the financial year to 14.4% in the second.

Credit Suisse Standard Securities' price target for Capitec is R65.

- Sake24.com

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