BizNews share shootout – Kokkie Kooyman picks his banking stock for 2022

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Banking analyst Kokkie Kooyman talks about his chosen stock pick in the financial services sector for 2022, naming Capitec. Capitec has been one of the best South Africa business stories since the start of the millennium and is now the country’s third-largest bank by market capitalisation. Under the stewardship of Gerrie Fourie, Capitec has continued to gain market share, becoming the low-cost banker to millions of South Africans. Despite analysts’ concerns surrounding its valuation, Kooyman says this is vindicated owing to its strong growth and innovation that keeps it ahead of its competitors. – Justin Rowe-Roberts

Kokkie Kooyman on the performance of the financial services industry in 2021:

In both cases, South Africa and overseas financial services companies have performed very well in 2021. The financial sector has outperformed global indices on a relative basis. In fact, quite strongly. The reasons are twofold. Number one, financials had a huge sell-off at the beginning of 2020 and the recovery continued. But the most important thing is that as economic growth came back, inflationary pressures came back, and the prospect of higher interest rates increased; higher interest rates are good for your financial sector so they re-rated. Maybe one other thing that played a role – and it’s going to be important going forward as well in the second and third quarter of 2020 – [is that] banks and insurance companies were forced to dramatically increase provisions by the new accounting regulations post the global financial crisis, and they were not allowed to buy back shares or pay dividends. OK, that’s a generalisation; in some cases, that were paying dividends but at a low level. So, banks entered 2021 with very high capital levels, internationally and in South Africa. Then as the recovery progressed, they [could] start using those reserves – which were unnecessary in the end – to start buying back shares and paying dividends. The bank sector globally is still on fairly good dividend yields and able to buy back shares quite a lot. I think that led to a lot of the re-rating.

On his chosen South African bank investment for 2022:

Firstly, I think what we’ve got to bear in mind is that it is a tough choice at the moment. All the banks in South Africa are cheap. When preparing for this, I looked at the upsides and it is difficult. You’ve got Absa and Nedbank trading at low valuations, very low valuations. Owing to the uncertainty we are currently facing again with Omicron and all kinds of uncertainty in terms of growth, do we go into further lockdowns again? Does the economy contract? It’s always better in a time of uncertainty to be with your players that have a proven track record of being on the front foot. In South Africa, these would be FirstRand and Capitec. My pick in this circumstance is Capitec for three reasons. Number one: it’s obviously a brilliant bank with great management that will continue to grow market share, especially on the digital side, where they are doing well. Very well capitalised, over reserved and fee income has become an increasingly big part of the business, with fee income now bigger than interest income. What I do like about Capitec in this tough environment is that they are the bank that has still got the most potential to continue taking market share. So, in an environment where weak loan growth is going to be tougher, Capitec can still grow its market share if we go into a harsher lockdown. It is still only 2% of the bank sector. Valuation is not cheap but it is justified by the growth potential. 

On 2022’s outlook for the banking sector:

The results – and the other banks will show the same – reveal what we were saying during the year; we will see retail growth picking up while corporate growth remains muted because of the uncertainty, but generally a better fee income and better activity. There has been a huge emphasis globally on cost containment. The reserves we spoke about, they’ve got excess reserves that they can still release. But now with the Omicron variant, it is going to make it very tough if it proves the vaccination helps us so we don’t go into severe lockdown. Then, I think growth will continue. 

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