Kokkie Kooyman: Banks offering great value – with resources, only cheap shares today

Sanlam’s Kokkie Kooyman is one of the few truly global fund managers working out of South Africa. The funds he manages are regular winners of international awards while Kooyman and his team spend more time travelling the world than at their Cape office. We managed to tie him down for a chat on CNBC Africa’s Power Lunch today – and got a pleasant reward: Kooyman believes that right now banking shares are offering great value. Not quite at the absolute bargain basement of resources stocks, but as they offer greater certainty, he reckons they’re an even better investment opportunity. – AH 

ALEC HOGG:  Global bank, Citi Group reported first quarter earnings that beat Wall Street expectations.  As we discuss global banks first quarter results, we’re joined by Kokkie Kooyman, Fund Manager at SIM Global.  Well, that’s your game Kokkie, not just the South African operations, but looking all around the world, too.  Those numbers that came up from Citi, were they an illustration of a banking system that is going to surprise on the upside?

KOKKIE KOOYMAN:  Yes, it’s always dangerous to look at one bank one quarter, but Citi’s were definitely better than expected.  If you look at JP Morgan, which was released just two days prior to that, that disappointed and the share price fell by four or five percent and you had Wells Fargo, which actually came through with quite good results so far.  The rest are still to follow.  Firstly, your question…you’re quite right.  The U.S. banking system is totally through the trough, it’s been recapitalised, and the bad debts are coming down rapidly.  We’re not seeing loan growth coming through strongly yet, so the earnings growth you do see in Citi is lower bad debts and expense management.  In fact, all of them are focusing on expense management and better capital management.  I think it looks quite interesting in the next 12/24 months.  If you look at the earnings per share growth forecast for most of these banks, you’re talking 50/60 percent for some of them simply because the bad debts start falling off quite rapidly.  If you look to 2015, the PE’s are eight-point-four, more or less all of them eight to eight-point-four or eight-point-five – not expensive, a system that’s been repaired, a U.S. economy growing at three percent.  In both our funds – our Best Ideas funds and our Global Finance funds – we’ve increased our holdings in those banks by quite a bit during the end of last year.

ALEC HOGG:  You have many followers Kokkie, not just in South Africa but also all over the world, for your funds.  You’ve been through a hard time.  Banking shares have not performed that well over the past little while.  Is it through the trough now?  Is your accumulation of more stocks telling us that you think better times are ahead?

KOKKIE KOOYMAN:  The valuations are at eight-point-four.  That means the PE’s are now about ten, which shows you that it’s cheap.  We did poorly, specifically last year, because we were quite heavy in emerging markets.  As you know, emerging markets took a big knock, specifically the currencies, and that came through strongly.  If you look at the growth rates in countries such as Indonesia, it’s still at five/six percent.  Brazil is turning around slowly.  India’s at a five percent growth rate.  Valuations are very low.  I think global financials look very interesting.  We just went through a whole review again this morning and yesterday of feedback from other conferences.  Globally, financials and resources stand out as the cheapest sectors in the world and resources, we know, have different problems relating to China’s growth rate.

GUGULETHU MFUPHI:  Kokkie, looking at South African banks, which are rather aggressive with regard to their African strategy, especially in a place such as Nigeria where there’s a lot of growth potential, but also just as many risks…what do you make of those?

KOKKIE KOOYMAN:  That’s a hell of a nice question.  It’s a pity we don’t have an hour.  The problem with Africa is corporate governance and again, last year in our funds, we suffered a few knocks and we learned some very hard lessons about corporate governance in countries such as China.  I think Africa is worse.  The problem is your good players are very expensive, so you have to pay up, and the poor quality players with poorer managements, are cheaper for a reason.  My big fear for South African banks going into Africa, is that every purchase is high risk.  Every acquisition is high risk because you think you’ve done your due diligence and it’s only three or four years later that you find out you didn’t really know what you’re buying or the management moved on somewhere else.  You can see that in Standard Bank’s results over the last four years, how they had to pay up for those acquisitions in Kenya and Nigeria.  The return on capital fell dramatically and for a while, Standard Bank went nowhere.  Your risk is that the other banks follow that, try to do acquisitions, and pay too much.  Having said that, Standard Bank’s acquisitions are now starting to come through.  You can see they’re focused on costs, so I think Standard Bank is well positioned.  Absa were obviously lucky in that regard, doing the Barclays deal, but they bought a business that was managed by a parent.  Nedbank is the one with the highest risk.  Maybe putting capital into Eco Bank, which is a conglomerate of 28 different banks…  I’m not sure if Eco Bank themselves, know what’s going on in all those banks because there are problems at the centre.  Lastly, you have FirstRand who have either been very clever in just taking their time, trying to be more Greenfields Operations, or going it slowly, really getting to know the lay of the land, and refusing to pay out for acquisitions.  All four banks are certainly doing well in Africa.  The percentage of income is growing.  What we mustn’t forget is unlike the retailers, for example Woolies and Shoprite where there’s very little competition, in Africa there are quite a few Pan-African banks that do cover 20 or 30 other countries, so it’s not as though we have the playing field to ourselves.

ALEC HOGG:  Kokkie, you mentioned just a little while ago –before answering that very comprehensive answer – that along with resources, banks are probably the cheapest in the world.  A little earlier in the program, I mentioned to Wilhelm Hertzog that his colleague Piet Viljoen, says that resources are offering a ‘once in a generational opportunity’.  Are banks also…are they that cheap?

KOKKIE KOOYMAN:  No, banks aren’t as cheap as they were a year or two ago.  Post-your crisis is when you really get things at their cheapest.  Bank of Ireland at that stage – I think I said it here on television as well – we were buying it for both our funds.  It was trading at a price-to-net asset value of point-three-three or a PE value of most probably three or four.  Now, it’s trading at a price-to-net asset value of one, so a lot of the really deep value has been removed by the market, but you’re still at low valuations because economic growth will come through.  Your problem with resources – and we generally don’t hold many resources in our funds.  We’re not really experts there – is simply the risk of a further slowdown in China.  Our visits to China show there, that seven percent growth rate is gone, I think, forever.  You’re not going to see that in China, so you have to start adjusting to a five/four percent growth rate.  In addition, there’s a lot of overcapacity in parts of the resource market, whereas in banking most of your competition has been eliminated.  There are many players who went under, who have been capped by their regulators, so there’s less competition with growth coming through.  On a certainty basis, I prefer banks.  However, on deep valuation I agree that resource stocks do look very cheap.

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