Market Outlook: SA Banking Update

Three (Nedbank, Standard Bank, ABSA) of the big-four SA banks released 1H19 results recently. The banks were expected to deliver anaemic growth and not since early 2018, when analysts started extrapolating the ‘New Dawn’, have we seen meaningful upgrades to the banking sector’s growth drivers. The big-four banks’ EPS expectations have continuously trended lower since c. April 2018.
 
With that in mind, the 3.0%, 3.7% and 5.7% YoY EPS growth delivered by ABSA, Nedbank and Standard Bank, respectively, were relatively in line with market expectations, although the moving parts in each case reflected varying degrees of quality.
 
The overriding themes identified in these results are: i) Each bank’s local operations were flat to down; ii) their respective Rest of Africa segments made the difference between delivering flat or positive earnings growth; iii) all three banks grew pre-provision operating profit; iv) all three experienced an uptick in credit loss ratios; and v) all three guided to FY19 EPS growth (although this was already baked into analyst expectations) and, looking at current FY20 EPS consensus forecasts, we suspect some downgrades might be on the cards.
 
However, over the past six weeks, we’ve seen a meaningful pullback across the sector (we note the sell-off wasn’t isolated to local banks) and, with most SA banks expected to still deliver marginally positive earnings growth, we have become more constructive due to their relatively cheap valuations.

So, why would we expect local banking shares to rerate, considering that SA is heading into a possible sovereign downgrade and against a volatile global equity backdrop? We don’t have all the answers (SA bonds are cheap and could provide valuation support) but, on a risk-reward basis, at current levels, an attractive scenario is playing out.
 
We favour FirstRand and Standard Bank, but view the recent ABSA results, especially from its domestic retail bank, as possibly signalling the start of a recovery after many years of underperformance.
 
We also think company specific factors are probably not as important as so-called bigger-picture variables including domestic economic growth, constructive economic policy (currently the direction is poor here), emerging market asset flows and the cost of money tied to global macro factors.
 
Written exclusively for Moore Stephens by Anchor Capital