Capitec, the South African bank twice rated the world’s best in the annual rankings by London-based Lafferty Group, was the biggest casualty on a wipeout day for financial shares. The stock’s share price lost an astonishing 38.5% in two trading sessions, down from Tuesday’s R1,110 to close at R682 tonight (Thursday). Those two trading days have knocked R50bn off the business’s imputed valuation with its market capitalisation now R80bn. Is this a portend of worse to come, or the buying opportunity of a lifetime? Capitec’s directors were quick to release a statement on SENS in an effort to calm its shareholders’ jangling nerves. And as you’ll hear in this podcast the bank’s argument gets some welcome support from Kokkie Kooyman, for many years South Africa’s leading banking sector investment analysts. In this special podcast the Denker Capital co-founder explains the reason for financial shares falling by an average of 7% on the JSE today – and why Capitec has been singled out for such a bludgeoning. – Alec Hogg
It’s been a wipeout day on the JSE today, particularly for financial shares and right on cue, Denker Capital’s Kokkie Kooyman has distributed a brief to clients of the firm, and of course, to us in the media to say that they’re finding opportunities amidst the fear. Now, just by way of background, Kokkie is the go-to man in South Africa for financial services analysis. He’s also the man who was there on hand when I had my very first look at Berkshire Hathaway, which was 15 years ago. But it’s a warm welcome to Kokkie on a day that I guess for you, must have been fielding many calls from those investors in your financial services fund.
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Yes, we’ve been getting quite a lot of calls and remarkably, you get two types. The ones that are really concerned and say, “Should I pull my money” and the other guys wanting to know, “Should I put my money in today or should I wait another week” and that sums it up, almost greed and fear. The fear is driven by the unknown and really, what you see in the market now (and we’ve seen it a few times in the past) where there are no buyers – because the buyers are stepping back – and so some managers who are getting panic withdrawals are having to sell into this void and that causes shares like Capitec and PSG to fall 30% on a day. It’s simply because when a large seller of liquid shares like Capitec comes on board, there isn’t enough buying and that just causes an artificial fall in price, which then sets another reaction in place because people think ‘is there something wrong with Capitec’ because they judge it by the share price. As you know, the share prices at the moment, just reflects liquidity, or the weak hand of the seller, not the underlying economic value. This is in my opinion, having been around in the financial services industry for 30 years, I’ve never seen valuations this attractive.
Just to dwell a little bit on Capitec… At one stage, it got R524 per share. It closed down at R683 but it’s still down 38% on the day. It’s almost unbelievable to see these kinds of moves. Is this really some asset manager who might have been forced to repurchase, to dump shares and as a consequence? If you look at it, what is the real value of this company now?
So, I looked when it was trading at R600. Then the price to NAV, which is a way we look at financials, was still 2.78. Now, that is still expensive because you now buy Nedbank (I think) at 0.7 but Capitec has been trading as high as six times, so you can see it’s a third of the valuation and Capitec’s more than half so historically, Capitec is incredibly cheap and that’s why in the end, buyers stepped in at that low price, saying, “This is a once-in-a-lifetime opportunity:” but Capitec has always been expensive because of what it is – it will go back to those expensive levels – maybe not back to where it was for a while. There are more questions that investors have to face. Do I invest today or do I wait for more certainty regarding the virus? That could be in a month’s time or two months’ time and then ‘what do I buy? Do I buy this business that has been smashed down like Nedbank in financial services or Absa?’ Or do I buy the quality like First Rand or Capitec? All our experience has shown that generally, when you’re in a crisis like this, you rather buy quality.
That’s interesting. You made a point of the price-to-book values. Just for the uninitiated, 0.7 means that the shares are trading at 70% of the liquidation value or the book value of Nedbank. Is that correct?
Quite correct. That is, in South Africa, since I think 1984 – and the date prior to 90 is bit sketchy… Those are the days when PW Botha made his Rubicon announcement and imposed a debt moratorium and a currency moratorium.
That was the debt standstill, wasn’t it, in 1985?
Yes, quite correct. And so, we introduced a sin Rand and a con Rand because money couldn’t leave the country and then, I think that’s the only time that bank shares were trading cheaper than they are today in terms of the price to nett asset value. By the way, this is not South Africa-specific. If you look at Europe and the US, a large bank like I&G, which has had a big recapitalisation program since 2008, is trading below 0.4 price to book so it’s a 60% discount to audited nett asset value and it’s on a dividend yield at the moment of 9%. Now, a lot of financials in the current climate might withhold paying the full dividend just until they get full certainty. It’s not because the business will fail or they need capital, but just for certainty. If you look at something like AIG – which I think is still one of the largest life insurers in the world – it is now trading at 0.25 price-to-earning. It’s a 75% discount. AIG, you’ll recall, was one of the last casualties in 2008 and Hank Paulsen in the end, had to rescue them and use taxpayers’ money, but we’ve been visiting them once/twice per year since then and there’s been a huge turnaround but the market has been going into panic mode and thinking ‘oh, we could see another 2008 and AIG might not make it’. That’s the type of market you see now, that decides even if AIG falls over (but it won’t), the whole group of financials won’t fall over and so maybe people make a mistake. They go and buy one share. You might just buy the one share that does fall over and that is why it’s better to just go into a fund where you get a diversified 20 or 30 financial shares, if you wanted to go into financials.
So, you’ve been analysing the stocks, visiting these executives, and kicking the tires for 30 years and you say that not since 1985 – Rubicon time – were prices of these stocks as cheap. How long typically, does it take to recover when you’ve had these kinds of (as in the global financial crisis and again, in 1987 and presumably, 1985 as well)… How long does it take for the system to flush out this fear characteristic?
There are three factors that normally play a role. One is the official response. In 2008 obviously, you had the US government step in and rescue. They rescued the banks of America. The Dutch government stepped in and rescued AMRO and Fortis and announced packages. At the moment, what we’re seeing a lot of is that the large governments are doing the same with announcing subsidies for bad debts or for even via just tax cuts. Normally, the turn comes when the public can see that the worst fears are over. I’ll never forget the date. It was the 1st of March, 2009 – so it actually went on for 15 months but you’ll recall that then there was a real fear that the whole financial system – as we knew it – was going to collapse. In the end, it was only when the world got certainty that it wasn’t going to happen, that it turned. In this case, it’s how much damage is the shutdown going to cause and there will be damage. There’ll be a lot of businesses that will go into liquidation (smaller businesses); not generally your larger businesses. Once we see a reversal of that, then the panic will stop. I would say from beginning to end, it could be 15 months. In this case, maybe 6 months – which means by July/August – when the infection rate starts falling in Italy. When airlines can start travelling again, and when restaurants are open. I think people are back to work in China, I think they’re close to opening restaurants again and once that happens, you’ve got a model you can follow. You can model Italy and London on that. Ideally, you want a second country to follow the China model and the next one would be Italy. If Italy’s new infection rate drops dramatically, and restaurants are opened, then the markets will shoot up because then suddenly, everyone will look forward and say, “Now, we must upgrade our price targets.” That’s when the money will start flooding in because the weak sellers are all out. The people who will be buying now will be strong hands and they will hold, so you won’t have any sellers and suddenly all the buyers will come back and push those prices right back up.
Kokkie, you said right at the beginning that the question that your clients are asking you is ‘should they buy now or should they wait and perhaps pick up these financial stocks at an even cheaper level in future’. How are you answering that?
I’ve actually written today, saying I’ve done it once in my life and it was a mistake. That was way back so, don’t borrow money to buy shares, but to getting into the valuations, I see we’re very close to the bottom; if you want to play it safe, you say ‘let’s wait for exactly what I said’. When restaurants get opened again in Italy and airlines resume the normal travel lines and take passengers… The problem is that when that happens, the market will react immediately and you will be 30%/40% higher than you are now. It depends on someone’s cash level and their risk tolerance. If you are somebody who’s been sitting with a lot of cash and you’ve been waiting for an occasion like this – like Warren Buffett – he’s been saying the market’s expensive. He’s built up his cash. Warren, I’m sure, is now – every week – starting to put money to work, but if you’ve only got R100,000 or R10,000, then maybe you wait a bit until you get more certainty. In terms of where valuations are, we are at record lows. One more very important point: all our research that we did on the banking and insurance sector in 2008, the good players all continue to grow shareholder value and people don’t understand that. They think in an ‘all fall down’ situation. The guys still grow shareholder value. The profits might not be as high as they were the previous year, but the shareholder value grows. That’s the good guys. So, there are always guys that fall over i.e. the Lehmann Brothers, the Deutsche Bank that almost went under, and the Royal Bank of Scotland. That’s where the market stands back and says ‘okay, I want more certainty’. But that’s where a diversified fund that focuses on quality and you feel that the value will be higher at the end of the year than it is now.
We spoke about Capitec as well, a trading statement has come up from the company – just to reiterate – saying that the headline earnings per share is going to be between 18-21% higher and actually, unusually, they refer to the sharp decline in the Capitec share price, and reference this to international shareholders who were concerned about the weakening of the Rand and thus have to dispose of their Capitec shares, as well as by algorithms applied by professional traders. Those seem to be technical reasons why Capitec’s share price would go down and I guess, maybe that’s an exception given its sharp decline and those unusual reasons that you might not be able to get it at these levels ? Could it be an idea to reinvest now rather than waiting for a month or so?
So it’s almost where we started that a lot of the share falls are caused – let’s call it technical reasons – by ETFs or index funds, just having withdrawals. Remember those trades are computer driven. So when you withdraw money, when you withdraw from an ETF fund, the computer has to sell whatever the price, so Capitec is in an ETF and the fund gets a withdrawal, the computer is going to push the price down until it finds a buyer and that is the difference from a mutual fund. There’s some human interaction, there’s a fund manager who sits there and says I’m going to sell Capitec at this level. The computer doesn’t do that. And that’s why a share like Capitec – which has a lot of international funds with large holdings and when they have cut outflows – they just have to sell. So you’re quite right, you’re going to start getting the opportunities like that now.You’re not going to see these prices again. So I think a lot of the price falls have been due to those technical type reasons, people who are selling don’t really realise what they’re getting the computer to do, if that makes sense.
It certainly does. Kokkie, we had a 100 basis point cut in interest rates today from the South African Reserve Bank, you mentioned almost obliquely that this could be the time that you can gear up and and buy shares. You’ve been burned like that once before but it’s at these kind of interest rates and the likelihood that they’re going to continue declining, surely that does, or that prospect does start coming into the equation, especially as you were mentioning, that you’ve got some Blue Chip banks overseas that are giving you a 9% dividend yield.
Especially in Europe, I mean, it’s almost a no brainer to borrow money there. Most you can borrow at 3% – to buy a group of financial shares or other shares – which give you different yields of let’s say 6, 7, 8%. In South Africa, interest rates are still fairly high and by the way – as a rule – I’ll never recommend that someone gears up. But on the point of cutting interest rates, that is something else that has been missed by the market. The lower fuel price, oil price, we’re going to see substantial cuts in the petrol price. So at the same time, interest rates are coming down, there is money that is flowing back into consumers pockets both here and in the US. If you think, in the US where they also cut 100 basis points, and that was the second cut. So the governments and central banks are doing what they can to really put money into people’s pockets. So once the virus scare is over and we return to normality, you’re gonna sit with a lot of pent up demand. Sure, there are going to be businesses that are falling over, your smaller restaurants, your smaller people in the tourism industry. But the majority of people are going to sit with more cash on their balance sheets.
So what is going to turn this around? For instance, the speculation is that tonight Donald Trump is going to announce that there are viral defenses. In other words, there’s some drugs in the United States that have been developed but aren’t going to have to go through the whole process – as usually is the case – because it’s a crisis and he’s going to release those into the marketplace to fight coronavirus. If something like that were to be announced, and indeed if they were to be successful, it’s the kind of news the markets would be waiting for?
It certainly would help, the only problem normally with that type of vaccine – and Trump being Trump – is that it needs time to be tested, it needs time to be checked for side effects. So the base case if there is a vaccine found, would take a year before it can really be put on the market. If Trump overrules that and speeds it up – I’d be surprised – but it’s something like that. I think the market is looking for signs that will show it how long they need to wait before we go to normality. The other thing, obviously is from April we start getting companies reporting their March results and they’ll give an update as to the business effect in March. Maybe markets will wait till August so you get the June results – three months of the worst period – but certainly anything that stops the virus and helps us return to normality will see a sharp rebound in the market.
So Donald Trump has got a vested interest, he wants to be re-elected. Certainly the speculation in our partners, The Wall Street Journal, is that he’s going to announce that they are going to let those experimental drugs into the market much quicker, in fact imminently, which will be an interesting reversal from previous issues, but I guess we’re in a crisis. Kokkie we’ve come back to that big question, buy now or wait?
I think it comes back to what I said earlier, if you’ve been sitting on cash and you’ve been wanting to go into the market, and you can’t afford to wait too long, then I’d start going in now, maybe put in some now, a third now, a quarter now, depending on if you’re already invested and you’re sitting on limited cash, then maybe wait another three weeks until you have more certainty.
And the stocks that are top of your hit list right now?
At the moment you can find the financial sector, almost anything because – and why I like the financial sector – it’s almost geared to sharp reversal. Retailers have held up the most so in your hotel industry, your financial sector, everything that’s been hit hard. In the financial sector you could buy First Rand, you could buy ABSA, can buy Nedbank – it has fallen tremendously because of the fears of their exposure to property – Investec is an interesting one that’s been falling hard. I hate buying index funds but this is almost where you could just go buy an index fund.
Kokkie Kooyman is the man who manages the award winning Denker Global Financial Fund. He’s the go-to man for anything about the financial services sector. As he says in 30 years he hasn’t seen value on the market quite like what he’s seeing today. So the real take out from that is if you’re fully invested, wait a few weeks before you plunge back in, if you have been waiting for this opportunity like Warren Buffett, well, you won’t get a better chance than right now. So start nibbling away. This is the rational insight from BizNews Radio, I’m Alec Hogg, until the next time, Cheerio!
Capitec SENS announcement
Shareholders are referred to the guidance provided in Capitec’s trading statement published on the JSE Stock Exchange News Service (“SENS”) on 6 March 2020 advising that headline earnings per share and earnings per share are expected to increase by between 18% and 21%. This guidance remains unchanged and Capitec’s fundamental business remains strong.
Globally, markets are in economic turmoil due to the effects of Covid-19, and many companies, including the banks, have seen big declines in their share prices.
Read also: Big banks threatened by fintech, smaller nimble banks – Kokkie Kooyman
We believe that the sharp decline in the Capitec ordinary share price since yesterday may be attributable to the following technical reasons:
- International shareholders are impacted by the continued weakening of the Rand which, over and above the declining share price, further motivated the disposal of their Capitec shares.
- The algorithms applied by professional traders enforce disposal of a share when the price of that share declines below a certain limit.
- Banks that are counter parties to collar transactions are inclined to sell the underlying share when contracted limits are breached.
There is speculation in the market that Capitec will be severely impacted by Covid-19 due to the market on which it focuses and its unsecured credit business model. Shareholders are reminded of the following important features of Capitec’s business model as highlighted in the FY2020 interim results published on SENS on 26 September 2019:
- Only 1.1 million of Capitec Bank’s 12.6 million active clients (9%) have credit with Capitec Bank.
- Capitec’s business model is well diversified and income is strengthened by transaction fee income and funeral cover sales. Net transaction fee and funeral income contribute 46% of net income and covers 91% of operating expenses.
- There has been a significant migration in Capitec Bank’s client base to the middle and higher income segment. 81% of credit granted in August 2019 was to clients with a gross salary of over R10 000 per month, and 47% to clients with a gross salary of over R20,000 per month.
- The bank has a strong retail deposit base.
Capitec’s liquidity position as of today remains strong and its liquidity ratios remain in line with that published on 12 December 2019 being:
- Capital Adequacy Ratio – 28.4%
- Liquidity Coverage Ratio – 1 444%
- Net Stable Funding Ratio – 186%
- Leverage Ratio – 16.6%
- Capitec Bank’s excess deposit base has grown by more than 5% from 31 August 2019.
Management continuously assesses changes in the economy and trading conditions and make appropriate adjustments to business and granting models as required. This is particularly relevant in these uncertain times.
Capitec’s full year results for the reporting period ended 29 February 2020 will be published on SENS on 14 April 2020 and in the press on 15 April 2020.
