Banks unlikely to cash in on ‘Cyril rally’ until late 2018
The renewed investor confidence in the banking sector will probably be rewarded only in the second half of 2018
Domestic banks are expected to manage only single-digit growth in headline earnings in 2018, even as Cyril Ramaphosa’s ascent to the highest office in the ruling party pushed banking shares towards their highest point in recent memory.
The "Ramaphosa rally" resulted in the banks index — SA’s gauge of banking shares — peaking at 9,618.67 points four days after Christmas, beating a previous high of 8,495.23 in April.
The renewed investor confidence in the banking sector will probably be rewarded only in the second half of 2018, when banks post interim results. "For the 2017 financial year, results to be released in February and March 2018, the sell-side analyst consensus forecasts are expecting only single digit headline earnings per share (HEPS) growth, with the strongest growth forecast for Standard Bank," said Adrian Cloete of PSG Wealth.
Growth at Standard Bank is expected in the upper single digits, an improvement on the R14.40 reported in 2017.
"Analyst consensus forecasts for 2018 are implying HEPS growth to increase slightly towards the mid/upper single digits, and double-digit growth for Nedbank as Ecobank Transnational Incorporated [ETI] moves from an earnings drag to a tailwind again."
Nedbank’s West African associate has historically had weak second-and third quarter results, which Nedbank records in its books a quarter behind, resulting in a loss from the associate for the first half of the year. ETI’s first-quarter results are traditionally stronger.
"As the economy is expected to recover in 2018, the banks’ HEPS growth rate could accelerate a bit during 2018," said Cloete.
The extent of economic recovery was highly dependent on government structural reforms.
Ramaphosa’s government-in-waiting, should the ANC’s highest decision-making body succeed in persuading President Jacob Zuma to step down, has the tough task of producing a credible budget after Finance Minister Malusi Gigaba’s dismal medium-term budget policy statement in October, which presented a picture of a state deep in financial trouble.
The Treasury expects a revenue shortfall of R50bn, resulting in government debt as a percentage of GDP rising to 50.7%, with expectations of stability deferred to the 2020-21 fiscal year, instead of 2017-18 as previously forecast.
Ratings agencies frowned on this and S&P and Fitch revised down their ratings of government debt late in 2017, – which affected the banks as none can be rated above the sovereign. Moody’s held back, placing SA on review.
Neelash Hansjee, banking analyst at Old Mutual Equities, said this downgrade – which together with S&P’s, would mark SA’s departure from the world’s major bond indices and essentially cut it off from quality funders – presented a large risk for domestic banks.
"The direct impact of a local currency downgrade is an increase in the funding costs for banks, which would introduce some margin pressure," said Hansjee. "This may get passed on to the consumer through higher borrowing costs. The indirect impact is greater levels of uncertainty for the economy – a crisis of confidence."
Cloete said that Moody’s could give SA a ratings reprieve if the government produced a good budget, demonstrated an intent to grow the economy, with decisive action on state-owned companies and a credible plan to stabilise the debt-to-GDP ratio at about 50%. "Improved consumer confidence should improve consumer demand for lending products and improved business confidence could encourage companies to borrow money for capital expenditure projects to grow their businesses," said Cloete.