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South Africa's banks present a complex investment decision. Simply put, are banking shares worth buying?
Looking at the table the answer would be an obvious “yes”.
Market capitalisation of all the banks has come down from the previous year – just it did between 2007 and 2008.
So in terms of market value SA’s banks have retreated substantially.
However, at the same time return on equity as indicated in the table – a key measure for banks – is up (though some of those figures have also changed).
On that basis the banks are fired up and running along nicely: but that isn’t reflected in share prices.
However, the entire picture becomes more confusing when looking at latest market capitalisation figures.
The numbers in the table are obviously a little dated.
Bank share prices have run in the interim and with only once exception were at the time of writing higher than the market cap numbers in the table.
Hold, buy or sell?
The answer seems to also have investment professionals a little confused.
Consensus recommendations range from buy (Absa and Standard Bank) to hold (FirstRand, Nedbank, RMB Holdings) to sell (Capitec).
In last year’s Top 200 we thought bank shares, based on value, were worth buying.
That wasn’t a difficult call: shares had been beaten down too far due to concerns about the perilous state of banks worldwide and SA-based bank share prices have come back strongly since.
Capitec gained 165% (probably why it’s now being called a sell), Standard Bank 60% and almost all the rest by more than 40%.
Readers should note some financial results in the table are fairly dated due to financial year-ends.
However, results released subsequently showed earnings at Nedbank down by more than 25% while bad debts continued to climb.
New CEO Mike Brown said he believed the worst of the bad debt cycle was behind the bank but the outlook was still constrained.
Earlier, Absa reported a drop in profits (also driven by climbing bad debts as clients defaulted on loans) and forecast muted growth for 2010.
Market leader Standard Bank hadn’t yet released results at the time of writing but had indicated in a trading update earnings growth would be under pressure.
But it will probably put out the strongest results of SA’s Big Four banks.
It continues to lead the table in terms of total assets, market cap and pre-tax earnings.
CEO Jacko Maree was recently acknowledged as one of the top 50 emerging market business leaders.
Brics are back
Emerging markets is where Standard Bank is well established, not only in Africa but also offshore.
Mercantile Bank was under a cautionary announcement at end-February that seemed to be putting pressure on its share price.
It was the only bank that didn’t see market capitalisation increase over the past year.
The cautionary referred to advanced negotiations with two possible black empowerment partners that could see 10% of its shares being sold.
But to get back to the original question: With a murky outlook what’s the prospect for bank shares?
There’s still value and they should appreciate further, which makes the shares worth buying.
And when will share prices respond?
Probably when your bank manager starts smiling again.
That could be a long time.
- Finweek
Looking at the table the answer would be an obvious “yes”.
Market capitalisation of all the banks has come down from the previous year – just it did between 2007 and 2008.
So in terms of market value SA’s banks have retreated substantially.
However, at the same time return on equity as indicated in the table – a key measure for banks – is up (though some of those figures have also changed).
On that basis the banks are fired up and running along nicely: but that isn’t reflected in share prices.
However, the entire picture becomes more confusing when looking at latest market capitalisation figures.
The numbers in the table are obviously a little dated.
Bank share prices have run in the interim and with only once exception were at the time of writing higher than the market cap numbers in the table.
Hold, buy or sell?
The answer seems to also have investment professionals a little confused.
Consensus recommendations range from buy (Absa and Standard Bank) to hold (FirstRand, Nedbank, RMB Holdings) to sell (Capitec).
In last year’s Top 200 we thought bank shares, based on value, were worth buying.
That wasn’t a difficult call: shares had been beaten down too far due to concerns about the perilous state of banks worldwide and SA-based bank share prices have come back strongly since.
Capitec gained 165% (probably why it’s now being called a sell), Standard Bank 60% and almost all the rest by more than 40%.
Readers should note some financial results in the table are fairly dated due to financial year-ends.
However, results released subsequently showed earnings at Nedbank down by more than 25% while bad debts continued to climb.
New CEO Mike Brown said he believed the worst of the bad debt cycle was behind the bank but the outlook was still constrained.
Earlier, Absa reported a drop in profits (also driven by climbing bad debts as clients defaulted on loans) and forecast muted growth for 2010.
Market leader Standard Bank hadn’t yet released results at the time of writing but had indicated in a trading update earnings growth would be under pressure.
But it will probably put out the strongest results of SA’s Big Four banks.
It continues to lead the table in terms of total assets, market cap and pre-tax earnings.
CEO Jacko Maree was recently acknowledged as one of the top 50 emerging market business leaders.
Brics are back
Emerging markets is where Standard Bank is well established, not only in Africa but also offshore.
Mercantile Bank was under a cautionary announcement at end-February that seemed to be putting pressure on its share price.
It was the only bank that didn’t see market capitalisation increase over the past year.
The cautionary referred to advanced negotiations with two possible black empowerment partners that could see 10% of its shares being sold.
But to get back to the original question: With a murky outlook what’s the prospect for bank shares?
There’s still value and they should appreciate further, which makes the shares worth buying.
And when will share prices respond?
Probably when your bank manager starts smiling again.
That could be a long time.
- Finweek
