Santam: Good or bad investment? Top financial fund manager Kooyman sizes up the insurer

South African investment professional Kokkie Kooyman is probably the best financial sector analyst in the world. He knows every publicly listed bank and insurer. The Denker Capital global financial fund manager encouraged people to invest when the herd was stampeding away from stocks in 2020. Now, although markets have perked up, Kooyman believes bank stocks are likely to deliver superior returns and there’s an opportunity to get in relatively early for the ride. Big buyers are coming back into the market, with banks allowed to buy back their shares. In this interview, he sets out his global investment ideas. He also weighs in on South African bank shares – which have the weight of a troubled economy on them – and controversial SA insurer Santam, which has been fighting an ugly battle with its clients over business interruption cover. – Jackie Cameron

Kokkie Kooyman on how he finds good banks to invest in:

 I’ve been doing it for 30 years. So over the past 30 years, you do get to know – I think we know every bank and every insurer in the world and we’ve met with management. We know business. We’ve learned over the years what to look for in a good business. We’ve now got the data to back our assumptions as well.

On where bigger banks – such as HSBC – fit into his portfolio planning:

In the background, there are three things that are happening. Number one, very large international banks like HSBC, Standard Chartered are still actually battling the after effects of 2008, believe it or not. Also, Commerce Bank, Deutsche Bank, BNP simply because they were spread internationally and the whole game has changed. What we’re focusing much more is on local banks who have much better capital ratios and benefit from that. Banks are on the front foot. So generally you want to be in banks with good management, that have come through the crisis well.

[They] have got enough data and they’ve quickly reacted to the new situation. What has happened at the same time during 2020 – and that always happens in a crisis. Your mid cap, smaller cap banks and emerging market banks in a crisis normally fall. They fall more than the market. A smaller bank is always slightly higher risk than a bigger bank. So what we really have been targeting during 2020, is we’ve increased our exposure to a lot of smaller, medium banks.

Good banks who have come through the crisis well. LIC is one – the one in India we mentioned. There quite a few others. One savings bank in the UK. It lends to people who have multiple properties. In the US, it’s things like Signature Bank. So we prefer those much more, because they’re smaller – they’re still taking market share of the smaller, bigger guys – and also cheaper.

On South African banks:

Yes, South African banks, I think, are one of the best managed in the world. I think South Africa, as a country, has had so many problems thrown at it. There are a lot of factors that have played a role in making the guys good. Also, we tend to think a lot more longer term. South African banks and the South African financial sector has been, generally, quite good at capital allocation.

Very good at what we call underwriting skills, lending and insuring. So the qualities of the book, very good. The costs are very well managed and very high on capital adequacy and on reserves. So if the economy does surprise on the upside, and we think – despite all the gloom – the economy will mostly do better than we think.

South African banks are also still cheap and will actually come with reserve releases later in the year and will do very well. But compared internationally, we’re the equivalent of running a marathon with weights. The guys who are running without weights are going to do better. South Africa has weight in terms of its high debt ratios and the state institutions that have just been debilitated. In our Nedbank financial fund that we manage, we’ve got a very high exposure to banks and we like them. But in our international portfolio, we have no South African banks.

On Santam:

I think Santam were thrown by the business interruption claims. It’s a lot to do with legal wording, as to whether they really insured that. But [the] bottom line is, Santam has reinsurance. The court cases have helped them to push their claim through the reinsurers, because the court has ordered them to pay for the reinsurers [who] now have to repay them for the part that was reinsured. Santam has set aside massive provisions. Santam remains an unbelievable business. What we’ve seen globally, wherever you are, the insurance business – property and casualty insurance – after a big event like this, [you] normally have a very good cycle because clients realise they were under insured. They need more insurance, so what you get is a rate-hardening cycle. If you want the same insurance, you have to pay more. So there’s more demand at higher rates and Santam will benefit from that.

On the big boost for banks and insurers:

 I think maybe there’s one other thing, and it sounds small, but it is big. That will be the big boost, initially, for banks and insurers in that, during 2020, generally – and there were exceptions but not totally – they were prohibited from paying out, let’s call it, full dividends. Also in the US, banks were allowed to buy back shares. Now, that will end from as they start reporting results. Now, banks will be able to buy back shares in the US again – that’s big.

Buybacks account for a large percentage of turnover. So just the fact that the regulators are allowing banks to buy back shares again in the US, will boost confidence. There’s another big buyer coming into the market on that score. It’s similar in Europe, with being able to pay dividends. Initially, just 15% of profits – but that would be relaxed. So the dividends will make investors realise the crisis is over, the dividend yields are high. I think those two things will also cause a further re-rating again.

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