Picture: ISTOCK
Picture: ISTOCK

SA’s banking shares have reached levels last seen before the recall of Pravin Gordhan as finance minister, with the JSE’s banks index closing on Tuesday 0.39% off its high point for 2017.

"We think all the banks are relatively cheap versus an expensive market," said Simon Raubenheimer, portfolio manager at Allan Gray.

More than 15% of Allan Gray’s balanced fund was invested in banks, with more than 11% in insurance companies, some of which owned banks, he said.

Banking shares were hit hard by the recall of Gordhan and the ensuing cabinet reshuffle, shedding 14% in less than two weeks. Having gained 27% in 2016, the JSE banks index is up just 3% in 2017, with the country’s economic malaise adding downward pressure.

While it was impossible to predict SA’s economic trajectory, potential downside risk for banking stocks was more limited than possible upside, given the shares’ valuations and dividend yields, said Chris Steward, sector head of financials at Investec Asset Management, which was modestly overweight in banking shares.

Historically, valuations on domestic banking shares were very attractive, said Andrew Vintcent, portfolio manager at ClucasGray Asset Management. While banks were not offering an exciting earnings story in the current weak economy, dividend yields were high, with dividends likely to grow ahead of inflation, he said.

"The interest rate you get in a money market account with Absa is not much higher than the dividend yield you would get from buying the share, especially after tax. Buying Absa beats putting money into it," Raubenheimer said.

Allan Gray’s participation in the Barclays plc sale of more than one-third of Absa parent Barclays Africa catapulted it into a top 10 share across most of its client mandates. Barclays’s price-to-earnings ratio was at a 60% discount to the average JSE-listed company, a level only seen twice before, Raubenheimer said. "Its dividend yield is 1.7 times the dividend yield of the average company."

ClucasGray Asset Management had large weightings in Standard Bank and Barclays Africa, Vintcent said. "Standard Bank is seen as one of the preeminent banking franchises in SA and Africa, with good longer-term growth prospects. Barclays Africa offers investors an extremely attractive valuation."

The JSE banks index has a dividend yield of 4.7% and a price-to-earnings nearly half that of the all-share index.

"If things go a little bit better than projections, banks will be good investments.

The weak economy gives us the opportunity to buy decent assets at low valuations," Raubenheimer said. Over the long term, banks had grown profit by more than the average JSE-listed company.


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