Banking shares have gained strongly since the beginning of December as investors have pitched into stocks with domestic South African exposure in anticipation of happier economic times promised by the Cyril Ramaphosa victory.
Relative to the SA Inc story, the banks’ own idiosyncrasies have been a relatively small factor in the share-price rally. But the latest round of results has provided some support for banking shares, showing the big four’s resilience in 2017’s tough times.
All four have posted reasonably robust results, even if some look stronger than others. In its first set of annual results since former parent Barclays sold down its stake in 2017, Barclays Africa – soon to be Absa again – reported a 4% increase in headline earnings, though return on equity fell from 16.6% to 16.4%.
Analysts were most impressed with FirstRand and Standard, which derived much of their strong performance from revenue growth, but less so with Nedbank and Absa, which relied more on lower bad-debt impairments and cost control for earnings growth
Smaller Nedbank, which is also on its way to being freed from the control of parent Old Mutual, reported headline earnings growth of just 2.8% as the troubles at its African associate ETI continued to weigh on results — without it, the group would have posted earnings growth of 7.8%.
At FirstRand, earnings were up 7% and return on equity is the sector’s highest at 22.5%, while Standard Bank reported the strongest earnings growth, lifting headline earnings 14%. Standard’s big African footprint did great things for it over the period, though worked against it in results terms, with the strong rand and sliding African currencies weighing on earnings growth, which would have been 18% in constant currency terms. Return on equity was 17.1% but Standard is confident of even better times ahead and lifted the target range for return on equity from the 15% to 18% it set itself in 2014 to 18% to 20% over the medium term.
Analysts were most impressed with FirstRand and Standard, which derived much of their strong performance from revenue growth, but less so with Nedbank and Absa, which relied more on lower bad-debt impairments and cost control for earnings growth.
Investors have long since ceased to expect the stratospheric earnings growth of the early 2000s and have become accustomed to single-digit growth, but the results show SA’s banking sector has continued to be strong and stable in bad times, while the optimistic mood of the results presentations indicate better times ahead.
That will require that SA avoids a Moody’s downgrade and, particularly, that the Ramaphosa administration starts to deliver on its promise of growth-enhancing reforms. But assuming economic growth lifts and consumers and businesses continue to be confident, the banks will benefit on the revenue side.
If the strong rand and lower inflation outlook persist, allowing for interest rates to fall, that might work against them a little on the interest side — the "endowment effect". But the environment in which the banks operate can only be better than it was in 2017, and that has to be good for them.
This is just as well, given that competition is bound to get tougher with the entrance of a string of new banks. Discovery’s new bank will start up soon and is set to give the big four a go in years to come. The new TymeDigital bank and the Post Bank will also soon start operating as licensed banks, targeting mainly the low end of the market. And then there are new entrants, such as Michael Jordaan’s Zero, to shake things up in the sector.
Not only is the face of the sector changing, but the past few months have seen personnel changes at the top of the big banks, with the sector transforming and becoming more diverse.
At the same time, Absa is dealing with the challenges and costs of repositioning itself as a newly free agent, with ambitious aspirations to grow market share, while Nedbank is set to be unbundled later in 2018 from Old Mutual, once that company — housing the group’s South African and emerging-markets businesses — is unbundled from the Old Mutual parent and primary listing on the JSE.
Never let it be said then that South African banking is boring.