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Africa’s most valuable financial services group, FirstRand, today announced in a voluntary trading update that conditions have unexpectedly improved to the extent that it has reversed billions set aside to meet anticipated lockdown-related losses. In this podcast our go-to man on the sector, Denker Capital’s Kokkie Kooyman, helps investors put the news in perspective – for FirstRand itself and other JSE-listed banking stocks.
Kokkie Kooyman on why FirstRand would announce a voluntary trading update:
Often it is when the expectations or the actual result will be higher than they were guiding. This result that they’re guiding us towards now is considerably higher than previous guidance. I think they’re warning the market that the results are going to be quite good. I find it interesting that that the share price isn’t stronger. But I suppose banks have been fairly strong and maybe the market was cleverer than the sell side.
On the FirstRand provision last year:
I think there are two things we must bear in mind. Firstly, in the second half of last year, they took a massive provision – that depressed earnings of the second of the comparable period on the six months and also interest margins came down quite a bit. It seems as if, like with most other banks globally, the provisions that were taken in the second half of last year were too conservative.
Obviously at that stage, banks didn’t know exactly how bad the effect of lockdown was going to be. We will see much better than anticipated provision releases. But having said that, what’s also interesting is that they’re guiding that the interest margins are actually slightly higher – or higher than they anticipated. Now, the second half last year was a bit worse. But remember, with lower interest rates, that normally is not good for banks. It does mean that they managed their balance sheet quite well.
On whether this is an isolated experience or if other banks will have a similar experience:
This is actually a global experience. We’re finding it almost everywhere. There were actually one or two banks that still took an extra provision, where a lot of things went wrong. Like in India now, with a very strong second wave coming through. But generally everywhere, banks were forced to over provide because of all the regulations that were put into place post 2008. The other South African banks should have the same effect. In fact, there have been showing, that’s why I think the share prices have been higher and I think they have been guiding towards that this will happen.
On whether South Africa bank share prices have reacted in line with the rest of the world:
Our banks have lagged and I think that reflects still the concerns about the growth rate of the South African economy. The American banks have literally shot the lights out, although they still actually represent fairly good value. Europe, year-to-date, European banks – because they lagged last year – have really done well. I think shares like ING were having a portfolio up, something like 120% on the last seven or eight months.
South African banks have actually lagged their global peers. That is more, I think, reflecting still concerns about the growth rate in the economy going forward. Investors are saying, “shall we buy? The banks are in good shape and we are seeing that no other provision relief is coming through”. I think if our government was to introduce a few measures showing that they’re really going to try and make the economy grow with the right measures, the banks could rerate a lot further.
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