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South Africa’s globally-rated financial services analyst Kokkie Kooyman of Denker Capital joins BizNews founder Alec Hogg to run through the relative value offered by the country’s top six banks. While share prices for Absa and Standard Bank remain lower than before Covid struck, Capitec and FirstRand seem to have weathered the storm relatively well. Kooyman explains how, at the current share prices, there are two banks that present outstanding buying opportunities for investors following the long-overdue trend of switching from growth to value stocks. – Claire Badenhorst
Kokkie Kooyman on Denker Capital signing up with Janus Henderson:
It is indeed quite a big step for us, and they actually were looking to set up shop here in South Africa to distribute their products, and they got in contact with us to see if we could help them find somebody. And as we started talking, we said, but why don’t you do it with us? And they really liked that and they did quite a bit of homework, obviously, as well. For us to work with an organisation like that or that size – $430bn in assets and 350 investment professionals across the world – it’s big.
But what they really liked is through us they can get someone on the ground who’s working for them, who can put their products on the platforms, get the regulatory approvals. And in terms of for us, it helps because the products which they want to launch and are going to start with is a sustainable growth fund, which is very much the way the world is going, a property fund, which is obviously very interesting (this is European property), and then a tech fund. So, you know, three topical funds that we ourselves don’t offer. So for our marketing team, this is quite good. They’ve got a wider range to distribute and obviously, they can bring the name of Janus Henderson to our clients as well.
On Absa’s share price still not being back to pre-Covid levels:
There’s a lot behind that. So you’re quite right, and it’s interesting. The banks so far haven’t surpassed their 2019 earnings – Capitec is the only one that has – because a couple of things happened. Obviously, firstly, Covid really hit volumes and the banks throughout the world increased provisions for potential bad debts. [In] South Africa, a couple of things happened at the same time. Covid hit the country badly in that sense that, you know, we were a fairly indebted country in terms of our government debt to GDP. Some of the responses were good. Some of the responses weren’t good. But through Covid, the growth prospects for the South African economy have actually diminished. And then obviously, you had the KwaZulu-Natal riots, which actually further did damage to South Africa.
So the banks, in terms of the return on capital, are still below where they were in 2019. For instance, I mean, Absa was on a return on capital of 16-17% in 2019 and 2018. It fell to as low as a 6% ROE in 2020, but this year we forecast it to have a 14% ROE, so still not where it was. So the valuations are still not where they were. Going forward, a lot is going to depend on what government does. If it does start participating with the private sector, if it does start making the right decisions… but with the lower growth and the high risk of bad debts, the banks are remaining cheaper than they were before Covid.
On Capitec going beyond its pre-Covid level at R1,700 a share:
Capitec is now fairly expensive, but I’ve been foolish enough to say that for a long time. It’s one of those shares, because of its ability to compound and just keep growing, I did the homework and checked every time in the past when it was at this level and you thought it’s too expensive and had you bought it even at that point where it’s expensive, which remember is difficult for us as value-based managers, it still outperformed the rest of the sector on a three-year basis, even when you bought it from an expensive level, simply because the return on capital is higher than the others. And the shareholder value growth just keeps compounding at 20%.
So Capitec came through Covid very well. Firstly, it really started pushing transaction income faster to the extent where its fee income now almost covers its operational expenditure. It kept growing its client base dramatically. So Capitec has actually come through it very well, and you can see that in the share price. Standard Bank has also had its issues, also in Africa, the rest of the African continent has also been hard hit by Covid. Volumes down, the vaccination process [is] still slow, and that’s also hurt Standard Bank a bit, where Absa, funnily enough, was already on a comeback trail. It had done a lot of heavy lifting, and so they’ve actually come through it fairly well and we’re fairly positive on what Absa is doing and where they’re going.
On FirstRand weathering the storm:
Yes, FirstRand’s management team was certainly on the front foot. Also, they were fairly cautious and one could even say maybe they were too cautious. They’ve actually said with their last set of results they will now start opening caps again [and] get less conservative on credit extension. But FirstRand had one other differentiator, they did an acquisition in the UK – Aldermore – which has come through very well for them as well, and Aldermore’s results were actually fairly good, and that helped them maintain a fairly high rating. But you’re quite right. I think what investors are maybe missing is that all the banks continued to grow their shareholder value. But if you look at the PE or the price to net asset value that the market is putting on those, then the market is still not convinced that these banks will grow at the same rate now post-Covid than they did before Covid.
On Nedbank as a standout stock:
It is, I think, both Nedbank and Absa are standout, good value stocks and the problem often when you invest in value stocks, so-called, as a philosophy, you’re hoping there’s something wrong which made the market downgrade the stocks and you’re hoping for a turnaround. In this case, both companies are operating very well. Management teams are on the front foot. It’s just the environment that the market is worried about. So if the environment changes as it is and commodity prices stay higher, which obviously helps a lot of things – our budgets in terms of interest rates – then these stocks will rerate.
Nedbank, as you’ll recall, was hit the hardest because it had a fairly high commercial property exposure but that’s very well provided for and maybe the market’s still worried a bit about that. But you know, as the economy starts growing, those problem loans, if they are – so far, we haven’t heard of big problems but commercial property is a more difficult space – but Nedbank, I think, has fully provided for that and come through. So I think you’re quite right in that, on any measure, the banks in South Africa are still cheap, a bit like the banks in Europe. The US banks have rerated the most globally. They actually getting to, not quite expensive, but, you know, high levels. But the SA banks are standout.
On Investec being a good franchise with great value:
You’ll recall, I think we had a call, was it April 2020, where you asked me and I said, this is an investment opportunity of a lifetime. We said you should double if you invest in, specifically, banks at that stage because the market had just totally, totally overreacted to what was happening. Now, Investec is one where a lot has changed. Ninety One is our new management team. The market’s been very worried about what it sees as a sub-scale UK operation. But Investec, the new team, I must say, has really come through the crisis well as well. It remains an incredibly good franchise. So the challenge remains still in the UK, where they’ve done cost-cutting. So Investec, I agree with you, it’s, in fact, in the Nedbank Financials Fund we manage. It’s the third-largest exposure because of its valuation and then you still get a good management team, and you get exposure to pounds, which is a harder currency again, you know, for in case the South African investment case doesn’t come through.
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