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After a decade in the wilderness, South African banking shares are coming back into their own with positive winds now filling their sails. In this podcast, world-class financial services analyst Kokkie Kooyman shares his best ideas, offering strong recommendations for three JSE-listed banking stocks and some even cheaper names from Europe, including a wild card from Greece. He also addresses concerns about the impact of SA’s potential greylisting. He spoke to Alec Hogg of BizNews.
Excerpts from the full audio discussion with Kokkie Kooyman
Kookie Kooyman on the interviews featuring the CEO of Absa, FirstRand, Capitec and Nedbank and the differences between them
Regarding the interviews, it really struck me, as you say; of those first two on the Arrie and Pullinger, both of them emphasised the importance of culture and what they’re doing to ensure the teams below them think with them and work with them, and for the group as a whole. At FirstRand, because of Lauritz, GT and Paul have established that owner management culture much more. It’s ingrained. For the new CEO, all it really is about is ensuring the franchise that has been built up maintains the momentum of growing market share profitably. You can only do that when the top team thinks alike. I believe both emphasise the importance of what they do. I really enjoyed that part. Arrie was very interesting as well. He had the positive spinoff of the Barclays separation; pulling his team together at a low point. We have spoken about the last few years as to how they were succeeding. Initially there were risks. But now when a team pulls together, they are seeing the fruits of what they’ve done. You can see they are really working together well. I think the momentum is behind them and they are reaping the benefits of the separation. I must say when I listened to that interview, I didn’t realise how powerful it’s been; how by being released of that burden, they can now focus on client service. And then your interview with Capitec. It is just an amazing franchise. Their focus came across again in the interview on client satisfaction levels. To round that off, Nedbank’s Mike Brown and his team have really focused the last year, 18, 24 months, even longer on digitalisation. I really enjoyed those interviews. The bottom line is when you look at the ratios, we will compare them just now to European banks. Our banks are among the best in the world, all of them.
On Magnus Heystek’s theory about a potential market crash in SA if we become greylisted
The nature of the beast is to always want to see the worst-case scenario for South Africa. It’s never as bad as Magnus paints and it’s never as good as some of the others. But greylisting will be a negative. It will affect everybody. I’m not sure if your listeners are all up to date with the issue. The problem for us at the moment is not so much the large banks; their systems have been upgraded and interact very well with the FIC, etc. It is the property guys who buy and sell property and allow foreigners to buy local property and they whitewash money that way. Such as a gold exchange. It is those type of peripheral areas where it seems the biggest risk is of money coming in and out of the country and financing terrorism, according to the international authorities. To get the legislation in place for that seems to be what is taking the time now. If we do get greylisted, it sure is true. There will be greater scrutiny of every foreign transaction enforced by the international authorities because they will elevate the risk status of South Africa in the corresponding bank. Say, if I want to transfer money to IMG, and IMG says here is a South African recipient. I have to double the scrutiny or else I’m going to be in trouble with my central bank. The cost of doing business, especially in terms of exports and imports in South Africa, will increase. I don’t think it will be as dramatic, but there will be a negative effect. You think the most important thing is to grow jobs; you want capital to be put into businesses in South Africa and that capital becomes more expensive, so the hurdle rate goes up. You may rather sit with the money in government bonds, which, by the way, is not risk free, but you can earn 10% government bonds. Why should I risk starting a business when the cost of doing so is increasing? That is the negative of greylisting.
On whether we can still buy South African banks and, if so, what are the favourites
I think we are way past the point globally as well. Banks have lagged in South Africa. They have actually done relatively well, but obviously not in dollar terms but globally. Banks have been sold off. The valuations are really attractive. I think what most investors miss is the post-2008 regulatory changes. Banks hold two and a half, three times the amount of capital they held in 2008. The books are much more diversified. The loan losses are a lot less. So they are in a safer space and this is benefiting from higher interest rates. If you think long term,, traditionally you don’t want to own banks in the run up to a recession because you don’t know how bad the bad debts are going to be. Usually, banks are investment vehicles. You buy when the recovery starts because that’s really when you get strong loan growth, bad debts fall. This time, it is different, the banks fell in anticipation, but interest rates are going up much, much more. Your income statement, interest benefit is high, but the bad debt charge is not coming through. The negative is not coming through. This is why I think you could wait until we see the end of the global recession, which might be in six or nine months. However, you could miss out as the market realises. With these results coming through now, what I’m saying is correct in that bad debts are not going to be a problem. They are super cheap and the market buys them ahead of the upturn.
If you look at the valuations, Standard Bank and Absa are now about the same valuation at 1.2 times 1.1, to 11.9. Absa is going to initially generate a higher ROE for you. This is probably a better dividend. It has solved most of its problems whereas Standard Bank is still grappling with some of the problems; growing retail and especially the wealth networking into Africa. I would still prefer Standard Bank but Absa benefits from this cycle. FirstRand is that ship that just pumps away. Capitec is expensive, but it’s always expensive. Going through the numbers now, again, it is all these deals they are doing now. Getting a life licence would take four or five years before you see the benefit. The deal with Easyequities, the funeral policies, now the business banking, I think that’s going to kick in. Listening to your interview with Gerrie, he actually gave you that hint. He said, just check business banking. It will all be visible by April and the results will come through. So Capitec is one of those you just buy and keep for your children and later your grandchildren. They will look back and say, my dad was clever buying those Capitec stocks.
On whether you should rather be buying into the international banks
Yeah, I would. The environment we are in at the moment is there are so many different risks and so much volatility that I would buy a soc gen now, which does have risk but an extremely attractive valuation. You could get BNP Paribas. But remember, both are investment banks and could come with disappointing results now, but the retail franchise. What do you have to look at? What are they doing? It is growing strongly and you are getting a very good dividend yield. You could play it safe and go for IMG in the Netherlands, which hasn’t got investment banking, but I would buy that and maybe something like JP Morgan. It is trading in book, which is always a good entry point. If the war really escalates and does develop into World War Three, which we must pray doesn’t happen but then America is far away from war. Whereas Europe isn’t. So in a way, buying Europe now, you are taking a bet the war doesn’t escalate.
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