BROKERS’ NOTES: Buy Standard, sell Nedbank

Gary Booysen, portfolio manager: Rand Swiss 

Buy: Standard Bank

In banking, big is beautiful. And Standard Bank, Africa’s largest bank by assets, is our top local banking pick, edging out FirstRand for the first time in years. This juggernaut is moving from strength to strength. The group’s net interest income is benefiting from higher interest rates as margins expand, while its client base remains resilient, as can be seen in a reasonably robust credit loss ratio. The group is well capitalised and inexpensive on a trailing 12-month p:e of 8.18. On a technical basis the current buy range would be between R165 and R170.

Sell: Nedbank

If you’re looking to reduce total risk, you might consider pairing the Standard Bank “buy” with a Nedbank “short”. While Nedbank also benefits as interest rates rise, on a relative basis it  looks weaker than its peers. Return on common equity sits at 14%, the lowest among major South African banks. The bank projects this will rise to 17% by 2025, but achieving this could prove difficult. Nedbank’s credit quality is a concern as economic growth slows. Its current technology spending programme is nearing completion; but further  spending might be needed to keep pace with new entrants such as Discovery and Capitec. If economic conditions deteriorate significantly, the stock could provide a valuable hedge for those following a market-neutral trading strategy.